Pacira BioSciences Inc Annual Report 2013

Plain-text annual report

Use these links to rapidly review the documentTABLE OF CONTENTSIndex to Consolidated Financial StatementsTable of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K(Mark One) xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 For the Fiscal Year Ended: December 31, 2013 Or¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-35060 PACIRA PHARMACEUTICALS, INC.(Exact Name of Registrant as Specified in its Charter) Delaware51-0619477(State or Other Jurisdiction ofIncorporation or Organization)(I.R.S. Employer Identification No.) 5 Sylvan Way, Suite 100Parsippany, New Jersey 07054(Address of Principal Executive Offices) (Zip Code)Registrant’s Telephone Number, Including Area Code (973) 254-3560Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock, $0.001 par value The NASDAQ Global SelectMarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No xIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes x No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not becontained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o (Do not check if a smallerreporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No xThe aggregate market value of 20,909,360 shares of voting stock held by non-affiliates of the registrant, based upon the closing sale price of thecommon stock as reported on the NASDAQ on June 28, 2013, the last business day of the registrant's most recently completed second fiscal quarter, of$29.00 per share was $606,371,440. Shares of common stock held by each director and executive officer (and their respective affiliates) and by each personwho owns 10 percent or more of the outstanding common stock or who is otherwise believed by the registrant to be in a control position have been excluded.This determination of affiliate status is not necessarily a conclusive determination for other purposes.As of February 14, 2014, 33,714,015 shares of the registrant's common stock, $0.001 par value per share, were outstanding.DOCUMENTS INCORPORATED BY REFERENCEPart III of this Annual Report on Form 10-K incorporates certain information by reference from the registrant's proxy statement for the 2014 annualmeeting of stockholders to be filed no later than 120 days after the end of the registrant's fiscal year ended December 31, 2013.2Table of ContentsTable of Contents Page No.PART I 3Item 1.Business3Item 1A.Risk Factors21Item 1B.Unresolved Staff Comments43Item 2.Properties44Item 3.Legal Proceedings44Item 4.Mine Safety Disclosures44PART II 45Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities45Item 6.Selected Financial Data46Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations48Item 7A.Quantitative and Qualitative Disclosures about Market Risk61Item 8.Financial Statements and Supplementary Data63Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure63Item 9A.Controls and Procedures63Item 9B.Other Information65PART III 65Item 10.Directors, Executive Officers and Corporate Governance65Item 11.Executive Compensation65Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters65Item 13.Certain Relationships and Related Transactions, and Director Independence65Item 14.Principal Accountant Fees and Services65PART IV 65Item 15.Exhibits and Financial Statement Schedules65Forward-Looking StatementsThis Annual Report on Form 10-K and certain other communications made by us contains forward-looking statements within the meaning ofSection 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including statements about our growth and future operating results, discovery anddevelopment of products, strategic alliances and intellectual property. For this purpose, any statement that is not a statement of historical fact should beconsidered a forward-looking statement. We often use the words “believe,” “anticipate,” “plan,” “expect,” “intend,” “may,” and similar expressions to helpidentify forward-looking statements. We cannot assure you that our estimates, assumptions and expectations will prove to have been correct. These forward-looking statements include, among others, statements about: the success of our sales and manufacturing efforts in support of the commercialization ofEXPAREL; the rate and degree of market acceptance of EXPAREL; the size and growth of the potential markets for EXPAREL and our ability to serve thosemarkets; the Company’s plans to expand the indications of EXPAREL, including nerve block and the related timing and success of a supplemental U.S. Foodand Drug Administration New Drug Application; the Company’s plans to evaluate and pursue additional DepoFoam-based product candidates; clinicalstudies in support of an existing or potential DepoFoam based product; the Company’s plans to continue to manufacture and provide support services for itscommercial partners who have licensed DepoCyt(e); and our commercialization and marketing capabilities. Important factors could cause our actual results todiffer materially from those indicated or implied by forward-looking statements, including those discussed below in Part I-Item 1A. Risk Factors. Weundertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise andreaders should not rely on the forward-looking statements as representing the Company’s views as of any date subsequent to the date of the filing of thisAnnual Report on Form 10-K.These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels ofactivity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussedand referenced in Part I-Item 1A. Risk Factors.2Table of ContentsPART IItem 1. BusinessReferencesPacira Pharmaceuticals, Inc. is the holding company for our California operating subsidiary of the same name, which we refer to as PPI-California.In March 2007, we acquired PPI-California from SkyePharma Holding, Inc. (referred to in this Annual Report on Form 10-K as the “Acquisition”). Unless thecontext requires otherwise, references to “Pacira,” “we,” the “company,” “us” and “our” in this Annual Report on Form 10-K refers to PaciraPharmaceuticals, Inc., and its subsidiaries. In addition, references in this Annual Report on Form 10-K to DepoCyt(e) mean DepoCyt when discussed in thecontext of the United States and Canada and DepoCyte when discussed in the context of Europe.Corporate InformationWe were incorporated in Delaware under the name Blue Acquisition Corp. in December 2006 and changed our name to Pacira, Inc. in June 2007. InOctober 2010, we changed our name to Pacira Pharmaceuticals, Inc. Our principal executive offices are located at 5 Sylvan Way, Suite 100, Parsippany, NewJersey 07054, and our telephone number is (973) 254-3560.Pacira®, DepoFoam®, DepoCyt® (U.S. registration), DepoCyte® (EU registration), EXPAREL®, the Pacira logo and other trademarks or servicemarks of Pacira appearing in this Annual Report on Form 10-K are the property of Pacira. This Annual Report on Form 10-K contains additional trade names,trademarks and service marks of other companies.OverviewWe are a specialty pharmaceutical company focused on the development, commercialization and manufacture of pharmaceutical products, based onour proprietary DepoFoam® drug delivery technology, for use primarily in hospitals and ambulatory surgery centers. We operate in one reportable segment. OnOctober 28, 2011, the United States Food and Drug Administration, or FDA, approved our New Drug Application, or NDA, for our lead product candidate,EXPAREL®, a liposome injection of bupivacaine, an amide-type local anesthetic indicated for infiltration into the surgical site to produce postsurgicalanalgesia for up to 72 hours. We believe EXPAREL addresses a significant unmet medical need for a long-acting non-opioid postsurgical analgesic, resulting insimplified postsurgical pain management and reduced opioid consumption, leading to improved patient outcomes and enhanced hospital economics. We havedeveloped an internal sales force entirely dedicated to commercializing EXPAREL, which we commercially launched in April 2012. In addition, following apilot program, effective October 1, 2013, we appointed CrossLink BioScience, LLC, or CrossLink, for a term of five years as the exclusive third-partydistributor to promote and sell EXPAREL for orthopedic and spine surgeries in the United States, with the exception of certain geographical areas and accountssubject to change and adjustments by mutual agreement.Our net sales for EXPAREL in 2013 were $76.2 million, and our net sales for EXPAREL in our fiscal quarter ended December 31, 2013, which wasthe seventh quarter of our launch, were $30.5 million. A total of 2,106 accounts have ordered EXPAREL since launch through December 31, 2013, withapproximately 250 accounts having ordered more than $100,000 of EXPAREL by the end of 2013. During the fourth quarter of 2013, we added 374 newaccounts, averaging 29 new accounts per week. We believe EXPAREL will ultimately become a major hospital pharmaceutical brand.In addition to EXPAREL, DepoFoam is also the basis for our other FDA-approved commercial product, DepoCyt(e), which we manufacture for ourcommercial partners, as well as our other product candidates. For the years ended December 31, 2013, 2012 and 2011 sales of EXPAREL accounted for 89%,37% and 0% of total revenues and Depocyt(e) 10%, 15% and 66%, respectively.Our current product portfolio and product candidate pipeline is summarized in the table below:Product(s)/Product Candidate(s)Primary Indication(s) Status Commercialization RightsEXPARELPostsurgical analgesia by infiltration Marketed in U.S. Pacira (worldwide) Postsurgical analgesia-nerve block Phase 3 Pacira (worldwide)Bupivacaine Liposome InjectableSuspensionVeterinary postsurgical analgesia Filed INAD Aratana Therapeutics, Inc. (worldwide)3Table of ContentsProduct(s)/Product Candidate(s)Primary Indication(s) Status Commercialization RightsDepoCyt(e)Lymphomatous meningitis Marketed in U.S. Sigma-Tau Pharmaceuticals Marketed in E.U. Mundipharma InternationalDepoNSAIDAcute pain Preclinical Pacira (worldwide)DepoMethotrexateOncology Preclinical Pacira (worldwide)Our StrategyOur goal is to be a leading specialty pharmaceutical company focused on the development, commercialization and manufacture of proprietarypharmaceutical products principally for use in hospitals and ambulatory surgery centers. We plan to achieve this by:•commercializing EXPAREL in the United States for postsurgical analgesia by infiltration;•building a streamlined commercial organization concentrating on major hospitals and ambulatory surgery centers in the United States andtargeting surgeons, anesthesiologists, pharmacists and nurses;•demonstrating the economic benefits of EXPAREL, working directly with managed care payers, quality improvement organizations, KeyOpinion Leaders, or KOLs, in the field of postsurgical pain management and leading influence hospitals in conducting Phase 4 retrospectiveand prospective trials and drug utilization evaluations;•servicing the commercial audiences that are rapidly adopting EXPAREL in local infiltration procedures, including not only the soft tissuesurgical audiences that were the focus of the launch, but more recently expanding our education to audiences including the orthopedic, spine,and anesthesia (infiltration into the transverse abdominus plane—iTAP) who require similar education and training to ensure consistent,proper and safe use of the product;•obtaining FDA approval for nerve block indication for EXPAREL;•leveraging the development success of EXPAREL in the animal health market through our commercial partner for Bupivacaine LiposomeInjectable Suspension to serve the companion animal market;•manufacturing all our DepoFoam-based products, including EXPAREL, in facilities compliant with current Good Manufacturing Practices,or cGMP;•continuing to expand our marketed product portfolio through development of additional DepoFoam-based hospital products utilizing a505(b)(2) strategy, which permits us to rely upon the FDA's previous findings of safety and effectiveness for an approved product. A505(b)(2) strategy may not succeed if there are successful challenges to the FDA's interpretation of Section 505(b)(2); and•continuing research and development partnerships to provide DepoFoam-based products to enhance the duration of action and patientcompliance for partner products.EXPAREL-Our Lead ProductBased on our clinical data, EXPAREL provides continuous and extended postsurgical analgesia for up to 72 hours and reduces the consumption ofopioid medications. We believe EXPAREL will simplify postsurgical pain management, minimize breakthrough episodes of pain and has the potential to resultin improved patient outcomes and enhanced hospital economics.Our EXPAREL strategy has several principal elements:1)Replace the use of bupivacaine via elastomeric pumps as the foundation of a multimodal regimen for long-acting postsurgical painmanagement. Based on our clinical data, EXPAREL: •extends postsurgical analgesia for up to 72 hours, from approximately eight hours or less;4Table of Contents•utilizes existing postsurgical infiltration administration techniques;•dilutes easily with saline to reach desired volume;•is a ready-to-use formulation; and•facilitates treatment of both small and large surgical sites.2)Become the foundation of a long- acting postsurgical pain management regimen in order to reduce and delay opioid usage. Based onthe clinical data from our Phase 3 hemorrhoidectomy trial as well as our retrospective health outcomes studies data, EXPAREL:•significantly delays and reduces opioid usage while improving postsurgical pain management;•delays first opioid usage to approximately 14 hours post-surgery, compared to approximately one hour for placebo;•significantly increases the percentage of patients requiring no opioid rescue medication through 72 hours post-surgery, to 28% compared to10% for placebo;•results in 45% less opioid usage at 72 hours post-surgery compared to placebo; and•increases the percentage of patients who are pain free at 24 hours post-surgery compared to placebo.3)Improve patient satisfaction and outcomes. We believe EXPAREL:•provides effective pain control without the need for expensive and difficult-to-use delivery technologies that extend the duration of action forbupivacaine, such as elastomeric bags, or opioids administered through patient-controlled analgesia, or PCA, when considered as part of amultimodal postsurgical pain regimen;•reduces the need for patients to be constrained by elastomeric bags and PCA systems, which are clumsy, difficult to use and may introducecatheter-related issues, including infection;•promotes maintenance of early postsurgical pain management, which may reduce the time spent in the intensive care unit; and4)Develop and seek approval of additional indications for EXPAREL, including for nerve block administration. We believe the nerve blockindication for EXPAREL:•presents a low-cost opportunity for clinical development; and•enables us to fully leverage our manufacturing and sales infrastructure.EXPAREL Health Economic BenefitsIn addition to being efficacious and safe, we believe that EXPAREL provides health economic benefits that play an important role in formularydecision-making and that these health economic benefits are an often over-looked factor in planning for the commercial success of a pharmaceutical product.Several members of our management team have extensive experience applying health economic outcomes research to support the launch of successfulcommercial products. Our strategy is to work directly with our hospital C-suite customers, group purchasing organizations, integrated health networks,quality improvement organizations, KOLs in the field of postsurgical pain management and leading influence hospitals and to provide them with retrospectiveand prospective studies to demonstrate the economic benefits of EXPAREL.Our national, regional, and local analyses assessing retrospective health outcomes, conducted in conjunction with hospital customer groups utilizingtheir own hospital databases, revealed that the use of opioids for postsurgical pain control is a significant driver of hospital resource consumption, includinghigher hospitalization costs, longer length of stay, and higher readmission rates.5Table of ContentsPhase 4 Clinical StudiesWe recently completed our IMPROVE program, a series of open-label prospective Phase 4 clinical studies evaluating the differences in postsurgicalopioid use and health economic outcomes in patients undergoing open colectomy, ileostomy reversal, and lap colectomy. Findings consistently showedreduction in median length of hospital stay, mean hospitalization costs, and mean opioid consumption.Additionally, we conducted a Phase 4 study (the “TRANSCEND” trial) in patients undergoing gynecologic or colorectal surgery. Prior to surgery,patients received either EXPAREL or sham (normal saline) iTAP as part of a multimodal pain regimen. The study goal was to demonstrate the utility ofEXPAREL by achieving either co-primary endpoint of Day 3 Overall Benefit of Analgesia Score (OBAS) or total opioid rescue. A pre-planned interim analysiswas performed on the first 39 patients recruited, which revealed a signal in one of the co-primary endpoints (OBAS), but poor compliance with the algorithmfor total opioid rescue in the protocol and no signal for that co-primary endpoint. As a result, the decision was made not to continue the trial, but rather toanalyze all of the patients recruited up to that point (n=67). In this analysis, the total opioid rescue continued to show no signal (with only 35 percent ofpatients protocol compliant), while the OBAS demonstrated an advantage for EXPAREL (P<0.05) compared to the sham-treated group.EXPAREL Regulatory PlanThe NDA for EXPAREL was approved on October 28, 2011, using a 505(b)(2) application. The initial FDA approval of EXPAREL is for single-dose infiltration into the surgical site to produce postsurgical analgesia.EXPAREL consists of bupivacaine encapsulated in DepoFoam, both of which are used in FDA-approved products:•Bupivacaine, a well-characterized generic anesthetic/analgesic, has an established safety profile and over 20 years of use in the United States.•DepoFoam, modified to meet the requirements of each product, is used to extend the release of the active drug substances in the productsDepoCyt(e) and the no-longer marketed DepoDur.The FDA, as a condition of EXPAREL approval, has required us to study EXPAREL in pediatric patients. We have agreed to a trial timeline where,over several years, we will study pediatric patient populations in descending order starting with 12 to 18 year olds and ending with children under two yearsof age.Additional IndicationsWe are pursuing several additional indications for EXPAREL and expect to submit a supplemental U.S. Food and Drug Administration New DrugApplication, or sNDA, for nerve block administration. We believe that this additional indication for EXPAREL presents a low-cost opportunity for clinicaldevelopment and will allow us to fully leverage our manufacturing and commercial infrastructure.Nerve block is a general term used to refer to the injection of local anesthetic onto or near nerves for control of pain. Nerve blocks can be singleinjections but have limited duration of action. When extended pain management is required, a catheter is used to deliver bupivacaine continuously using anexternal pump. According to Thomson Data, over eight million nerve block procedures were conducted in the United States in 2008, with over four million ofthese procedures utilizing bupivacaine. EXPAREL is designed to provide extended pain management with a single injection utilizing a narrow gauge needle.In 2012, we initiated two pivotal nerve block trials comparing the effect of EXPAREL versus placebo through a femoral nerve block study for totalknee arthroplasty and an intercostal block study for posterolateral thoracotomy procedures. In May 2013, we reported positive findings from the first part ofour femoral nerve block study for total knee arthroplasty; the final part of this study is still ongoing. In August 2013, we reported that the intercostal nerveblock study for posterolateral thoracotomy did not achieve its primary endpoint. The FDA has previously indicated to us at its end of Phase 2 meeting that asingle pivotal trial meeting its primary endpoint would be sufficient to gain approval for the nerve block indication, assuming demonstration of adequatesafety. We plan to submit data from the ongoing femoral nerve block study to demonstrate efficacy and safety, as well as safety data from the intercostal nerveblock study, for an sNDA, anticipated in early 2014. We believe that this new indication will present an alternative long-term method of pain control with asingle injection, replacing the costly and cumbersome standard of care requiring a perineural catheter, drug reservoir and pump needed to continuously deliverbupivacaine.6Table of ContentsSales and MarketingWe have built our marketing and sales organization to commercialize EXPAREL and our product candidates in the United States. We intend to out-license commercialization rights for other territories. Our goal is to retain significant control over the development process and commercial execution for ourproduct candidates, while participating in a meaningful way in the economics of all products that we bring to the market.Our commercial team, consisting of both sales representatives and scientific and medical affairs professionals, executes on a full range of activitiesfor EXPAREL, including:•providing publications and abstracts showing the EXPAREL clinical program efficacy and safety, health outcomes program and reviewarticles on pain management;•working in tandem with hospital staff, such as registered nurses, surgeons, heads of quality, pharmacists and C-level executives, to provideaccess and resources for drug utilization (DUE) or medication use evaluations (MUE), and Health Outcomes Studies, which provideretrospective and prospective analyses for our hospital customers using their own hospital data to demonstrate the true cost of opioid-basedpostsurgical pain control;•working with KOLs and advisory boards to address topics of best practice techniques as well as guidelines and protocols for the use ofEXPAREL, meeting the educational and training needs of our physician, surgeon, anesthesiologist, pharmacist and registered nursecustomers; and•undertaking education initiatives such as center of excellence programs, preceptorship programs, pain protocols and predictive models forenhanced patient care, interactive discussion forums, web-based training and virtual launch programs.Initially at launch, we outsourced our dedicated commercial sales force through our relationship with Quintiles Commercial US, Inc., or Quintiles.On January 28, 2013, this sales force transitioned from Quintiles employees to Pacira employees. They are supported by our current marketing team as wellas teams of healthcare professionals, including medical affairs, scientific affairs and nursing teams, who support our formulary approval and customereducation initiatives. Additionally, on October 1, 2013, we entered into an agreement with CrossLink to act as a local agent and lead partner in collaborationwith additional distributors to promote and sell EXPAREL in select territories in the United States for postsurgical pain management following orthopedic andspine procedures.In order to increase the speed with which we address market segments, or to increase our access to market segments that we are currently notaddressing, we may expand our sales resources in the future directly or by developing additional relationships with third parties that agree to sell our product.The primary target audience for EXPAREL is healthcare practitioners who influence pain management decisions, including surgeons,anesthesiologists, pharmacists and nurses.DepoFoam-Our Proprietary Drug Delivery TechnologyOur current product development activities utilize our proprietary DepoFoam drug delivery technology. DepoFoam consists of microscopic sphericalparticles composed of a honeycomb-like structure of numerous internal aqueous chambers containing an active drug ingredient. Each chamber is separatedfrom adjacent chambers by lipid membranes. Following injection, the DepoFoam particles release drug over an extended period of time by erosion and/orreorganization of the particles’ lipid membranes. Release rates are determined by the choice and relative amounts of lipids in the formulation.We believe DepoFoam formulation provides several technical, regulatory and commercial advantages over competitive technologies, including:•Convenience. Our DepoFoam products are ready to use and do not require reconstitution or mixing with another solution, and can be usedwith patient-friendly narrow gauge needles and pen systems;•Multiple regulatory precedents. Our current and past DepoFoam products, including DepoCyt(e) and DepoDur, have been approved in theUnited States and Europe, making regulatory authorities familiar with our DepoFoam technology;7Table of Contents•Extensive safety history. Our DepoFoam products have over ten years of safety data as DepoCyt(e) has been sold in the United States since1999;•Proven manufacturing capabilities. We make the DepoFoam-based products, EXPAREL and DepoCyt(e) in our cGMP facilities;•Flexible time release. Encapsulated drug releases over a desired period of time, from 1 to 30 days;•Favorable pharmacokinetics. Decrease in adverse events associated with high peak blood levels, thereby improving the utility of theproduct;•Shortened development timeline. Does not alter the native molecule, potentially enabling the filing of a 505(b)(2) application; and•Aseptic manufacturing and filling. Enables use with proteins, peptides, nucleic acids, vaccines and small molecules.Other ProductsDepoCyt(e)DepoCyt(e) is a sustained-release liposomal formulation of the chemotherapeutic agent cytarabine utilizing our DepoFoam technology. DepoCyt(e) isindicated for the intrathecal treatment of lymphomatous meningitis, a life-threatening complication of lymphoma, a cancer of the immune system.Lymphomatous meningitis can be controlled with conventional cytarabine, but because of the drug’s short half-life, a spinal injection is required twice perweek, whereas DepoCyt(e) is dosed once every two weeks in an outpatient setting. DepoCyt(e) was granted accelerated approval by the FDA in 1999 and fullapproval in 2007. We recognized revenue from DepoCyt(e) of $8.4 million from our commercial partners in 2013.Product CandidatesDepoNSAIDOur preclinical product candidates, extended release formulations of NSAIDs, are designed to provide the benefits of injectable NSAIDs with aprolonged duration of action in order to improve patient care and ease of use in the acute pain environment. Currently available injectable systemic productsprovide a four to six hour duration of action. We believe that there is an unmet medical need for a product which could provide a local infiltration since themode of action for NSAIDs is by local activity. A product developed for local infiltration should provide pain relief with a much lower dose of NSAID andpotentially avoid the side effects commonly associated with the systemic use of these agents. We have DepoFoam formulations for several NSAIDs, and weexpect to select a lead product candidate in 2014.Commercial Partners and AgreementsSkyePharma Holdings, Inc.In connection with the stock purchase agreement related to the Acquisition, we agreed to pay SkyePharma Holdings, Inc., or Skyepharma, specifiedcontingent milestone payments related to EXPAREL sales as set forth below:(i)$10.0 million upon first commercial sale in the United States;(ii)$4.0 million upon first commercial sale in a major EU country (United Kingdom, France,Germany, Italy and Spain);(iii)$8.0 million when annual net sales collected reach $100.0 million;(iv)$8.0 million when annual net sales collected reach $250.0 million; and(v)$32.0 million when annual net sales collected reach $500.0 million. The first contingency was resolved in April 2012, resulting in a $10.0 million payment to Skyepharma.Additionally, we agreed to pay to Skyepharma 3% of net sales of EXPAREL collected in the United States, Japan, the United Kingdom, France,Germany, Italy and Spain. Such obligations to make percentage payments will continue for the term in which such sales related to EXPAREL are covered by avalid claim in certain patent rights related to EXPAREL and other8Table of Contentsbiologics products. The expiration date of the last valid claim will occur in 2018. Cumulatively through December 31, 2013, Skyepharma has earned $2.4million of percentage payments on net sales of EXPAREL collected. We have the right to cease paying the 3% percentage payments in the event thatSkyepharma breaches certain covenants not to compete contained in the stock purchase agreement. In the event that we cease to sell EXPAREL and beginmarketing a similar replacement product for EXPAREL, we would no longer be obligated to make percentage payments, but we may be required to makecertain milestone payments upon reaching certain sales milestones.For additional information related to the Skyepharma agreement, please refer to Note 6, Goodwill and Intangible Assets, in the Consolidated FinancialStatements.Research Development FoundationPursuant to an agreement with one of our stockholders, the Research Development Foundation, or RDF, we are required to pay RDF a low single-digitroyalty on the collection of revenues from our DepoFoam-based products, for as long as certain patents assigned to us under the agreement remain valid. RDFhas the right to terminate the agreement for an uncured material breach by us, in connection with our bankruptcy or insolvency or if we directly or indirectlyoppose or dispute the validity of the assigned patent rights.Sigma-Tau Pharmaceuticals, Inc.In December 2002, we entered into a supply and distribution agreement with Enzon Pharmaceuticals Inc. regarding the sale of DepoCyt. Pursuant tothe agreement, Enzon was appointed the exclusive distributor of DepoCyt in the United States and Canada for a ten-year term. In January 2010, Sigma-TauPharmaceuticals, Inc., or Sigma-Tau, acquired the rights to sell DepoCyt from Enzon Pharmaceuticals for the United States and Canada. Under the supplyand distribution agreement, we supply unlabeled DepoCyt vials to Sigma-Tau for finished packaging. Under these agreements, we receive a fixed payment formanufacturing the vials of DepoCyt and an additional royalty payment, if Sigma-Tau’s quarterly net sales exceed a certain amount, which brings totalpayments in the thirty percent range on sales by Sigma-Tau in the United States and Canada.We and Sigma-Tau have the right to terminate the agreement for an uncured material breach by the other party or in the event that a genericpharmaceutical product that is therapeutically equivalent to DepoCyt is commercialized. We may terminate the agreement if certain minimum sales targets arenot met by Sigma-Tau. Sigma-Tau may terminate the agreement if, as a result of a settlement or a final court or regulatory action, the manufacture, use or saleof DepoCyt in the United States is prohibited.Mundipharma International Holdings LimitedIn June 2003, we entered into an agreement granting Mundipharma International Holdings Limited, or Mundipharma, exclusive marketing anddistribution rights to DepoCyte in the European Union and certain other European countries. This agreement has a term of 15 years, and after that termexpires, continues year to year unless terminated by us or by Mundipharma upon no less than 12 months written notice.Under the agreement, as amended, and a separate supply agreement, we receive a fixed payment for manufacturing the vials of DepoCyte, as well asa royalty in addition to the fixed sum per vial supplied to Mundipharma, if Mundipharma’s quarterly net sales exceed a certain amount, and a mid single-digitroyalty on all annual sales exceeding a certain amount. We are also entitled to receive up to €10.0 million in milestone payments from Mundipharma upon theachievement by Mundipharma of certain milestone events, of which we have already received €2.5 million and we do not expect to receive the remaining€7.5 million.We and Mundipharma have the right to terminate the agreement for an uncured material breach by the other party, in connection with the otherparty’s bankruptcy or insolvency or the repossession of all or any material part of the other party’s business or assets. Mundipharma has the right toterminate the agreement if its marketing authorization is cancelled or withdrawn for a certain period, or if it is prevented from selling DepoCyte in any threecountries in the territory covered in the agreement by a final non-appealable judgment in respect of infringement by DepoCyte of any third party intellectualproperty rights.Paul Capital Advisors LLCOn March 23, 2007, we entered into an amended and restated royalty interests assignment agreement with Paul Capital Advisors LLC, or PaulCapital, pursuant to which we assigned to Paul Capital the right to receive a portion of our9Table of Contentsroyalty payments from DepoCyt(e) and DepoDur. The original agreement was entered into prior to the Acquisition by Skyepharma in order to monetize certainroyalty payments from DepoCyt(e) and DepoDur. In connection with the Acquisition, the original agreement with Paul Capital was amended and restated andthe responsibility to pay the royalty interest in product sales of DepoCyt(e) and DepoDur was transferred to us and we were required to make payments to PaulCapital upon the occurrence of certain events. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results ofOperations-Liquidity and Capital Resources-Royalty Interests Assignment Agreement” and “Risk Factors-Risks Related to Our Financial Condition andCapital Requirements.” Under our financing arrangement with Paul Capital, upon the occurrence of certain events, Paul Capital may require us to repurchasethe right to receive royalty payments that we assigned to it, or may foreclose on certain assets that secure our obligations to Paul Capital. Any exercise by PaulCapital of its right to cause us to repurchase the assigned right or any foreclosure by Paul Capital would adversely affect our results of operations and ourfinancial condition. This financing arrangement terminates on December 31, 2014.Aratana Therapeutics, Inc.On December 5, 2012 we entered into an Exclusive License, Development and Commercialization Agreement and related Supply Agreement withAratana Therapeutics, Inc. or Aratana. Under the agreements, we granted Aratana an exclusive royalty-bearing license, including the limited right to grantsublicenses, for the development and commercialization of our bupivacaine liposome injectable suspension product for animal health indications. Under theagreement, Aratana will develop and seek approval for the use of the product in veterinary surgery to manage postsurgical pain, focusing initially ondeveloping it for cats, dogs and other companion animals.In connection with our entry into the agreement, we received a one-time payment of $1.0 million and are eligible to receive up to an additional aggregate$42.5 million upon the achievement of development and commercial milestones, of which we received $0.5 million in 2013. Once the product has beenapproved by the Food and Drug Administration for sale in the United States, Aratana will pay us a tiered double digit royalty on net sales made in the UnitedStates. If the product is approved by foreign regulatory agencies for sale outside of the United States, Aratana will pay us a tiered double digit royalty on suchnet sales. Royalty rates will be reduced by a certain percentage upon the entry of a generic competitor for animal health indications into a jurisdiction or ifAratana must pay royalties to third parties under certain circumstances.Either party has the right to terminate the license agreement in connection with (i) an insolvency event involving the other party that is not dischargedin a specified period of time, (ii) a material breach of the agreement by the other party that remains uncured for a specified cure period or (iii) the failure toachieve a minimum annual revenue as set forth in the agreement, all on specified notice. We may terminate the agreement in connection with (i) Aratana’sfailure to pay any amounts due under the agreement, (ii) Aratana’s failure to achieve regulatory approval in a particular jurisdiction with respect to suchjurisdiction or (iii) Aratana’s failure to achieve its first commercial sale within a certain amount of time on a country by country basis after receiving regulatoryapproval, all on specified notice. Aratana may terminate the license agreement (i) upon the entry of a generic competitor for animal health indications on acountry by country basis or (ii) at any time on a country by country basis except with respect to the United States and any country in the European Union, allon specified notice. The parties may also terminate the license agreement by mutual consent. The license agreement will terminate automatically if we terminatethe supply agreement. In the event that the License Agreement is terminated, all rights to the product (on a jurisdiction by jurisdiction basis) will be terminatedand returned to us.Unless terminated earlier pursuant to its terms, the license agreement is effective until December 5, 2027, after which Aratana has the option toextend the agreement for an additional five (5) year term, subject to certain requirements.CrossLink BioScience, LLCEffective October 1, 2013, we and CrossLink commenced a five-year arrangement for the promotion and sale of EXPAREL, pursuant to the terms ofa Master Distributor Agreement (as amended, the “Agreement”). We entered into the Agreement on March 11, 2013, which provided for an initial small-scalepilot period commencing on April 1, 2013 and ending on September 30, 2013 (the “Pilot Period”), during which CrossLink was appointed as the exclusivedistributor of EXPAREL for certain specified accounts. The Agreement permitted either party to terminate the Agreement within 15 days prior to the expirationof the Pilot Period, and unless such termination was effected, the Agreement would automatically renew for a term of five years, commencing on October 1,2013 and ending on September 30, 2018 (the “Term”). Neither party provided notice of termination, and upon the commencement of the Term, certainperformance metrics and payment terms became effective, and CrossLink’s distribution territory expanded. Under the Agreement, we appointed CrossLink as the exclusive third-party distributor during the Term to promote and sell EXPAREL for orthopedicand spine surgeries in the United States, with the exception of certain geographical areas and10Table of Contentsaccounts (the “Territory”). The prices and purchasing terms related to sales of EXPAREL are determined by us, and all orders are subject to acceptance orrejection by us. CrossLink is entitled to receive commissions on its sales of EXPAREL in the Territory, subject to certain conditions and adjustments.CrossLink may receive additional performance-based payments if it achieves certain sales goals, and we may terminate the Agreement if CrossLink fails tomeet certain minimum performance metrics. CrossLink and any sub-distributors engaged by CrossLink pursuant to the terms of the Agreement are subject to certain obligations and restrictions,including required compliance with certain laws and regulations, confidentiality obligations and our policies. The Agreement contains customaryrepresentations and warranties and mutual indemnification obligations. In addition, CrossLink and its sub-distributors are prohibited from promoting, sellingor distributing any competitive products during the Term. Pacira and CrossLink have mutual termination rights under the Agreement, and we have additional unilateral termination rights under certaincircumstances. The Agreement also permits us to terminate the Agreement without cause effective September 30, 2016, subject to certain terms and conditionsset forth in the Agreement.Significant CustomersWe had three customers each comprising 10% or more of our total revenue for the year ended December 31, 2013. AmerisourceBergen HealthCorporation, Cardinal Health, Inc. and McKesson Drug Company accounted for 33%, 28%, and 18% of our revenues, respectively. These customers arewholesalers that process orders for EXPAREL under a drop-ship program.ManufacturingWe manufacture EXPAREL and DepoCyt(e) in two manufacturing facilities that we refer to as the Science Center Campus in San Diego, California.These facilities are designated as Building 1 and Building 6 and are located within two miles of each other on two separate and distinct sites. Our facilities areinspected regularly and approved for pharmaceutical manufacturing by the FDA, the European Medicines Agency, or the EMA, the Medicines and HealthcareProducts Regulatory Agency, or the MHRA, the Drug Enforcement Administration, or the DEA, and the Environmental Protection Agency, or the EPA.We purchase raw materials and components from third party suppliers in order to manufacture EXPAREL. In most instances, alternative sources ofsupply are available, although switching to an alternative source would, in some instances, take time and could lead to delays in manufacturing our drugcandidates. We also purchase raw materials and equipment from third party suppliers, for the manufacture of DepoCyt(e). While we have not experiencedshortages of our raw materials in the past, such suppliers may not sell these raw materials to us at the times that we need them or on commercially reasonableterms and we do not have any control over the process or timing of the acquisition of these raw materials from our suppliers.All manufacturing of products, initial product release and stability testing are conducted by us in accordance with cGMP.Building 1 is an approximately 84,000 square foot concrete structure located on a five acre site. It was custom built as a pharmaceutical R&D andmanufacturing facility in August 1995. Activities in this facility include the manufacture of EXPAREL bulk pharmaceutical product candidate in a dedicatedproduction line and its fill/finish into vials, microbiological and quality control testing, product storage, development of analytical methods, research anddevelopment, the coordination of clinical and regulatory functions, and general administrative functions. To date, the bulk manufacturing of all EXPARELproduct sold to the marketplace has occurred in a manufacturing line housed in what we refer to as Suite A. We are currently working to expand ourmanufacturing capacity and anticipate receiving FDA approval for our newly installed manufacturing line, referred to as Suite C, in the second quarter of2014. Combined with Suite A, we expect Suite C to significantly increase our manufacturing capacity and ability to meet the growing demand for EXPAREL.We plan to further expand our manufacturing capacity either directly or through third parties as demand for EXPAREL increases.Building 6 is located in a 17-acre pharmaceutical industrial park. It is a two story concrete masonry structure built in 1977 that we and ourpredecessors have leased since August 1993. We occupy approximately 22,000 square feet of the first floor. Building 6 houses the current manufacturingprocess for DepoCyt(e), the fill/finish of DepoCyt(e) into vials, a pilot plant suite for new product development and early stage clinical product production, amicrobiology laboratory and miscellaneous support and maintenance areas.11Table of ContentsDistribution of our DepoFoam products, including EXPAREL, requires cold-chain distribution, whereby a product must be maintained betweenspecified temperatures. We have validated processes for continuous monitoring of temperature from manufacturing through delivery to the end-user. We andour partners utilize similar cold-chain processes for DepoCyt(e).Intellectual Property and ExclusivityWe seek to protect our product candidates and our technology through a combination of patents, trade secrets, proprietary know-how, regulatoryexclusivity and contractual restrictions on disclosure.Patents and Patent ApplicationsWe seek to protect the proprietary position of our product candidates by, among other methods, filing U.S. and foreign patent applications related toour proprietary technology, inventions and improvements that are important to the development of our business. As of December 31, 2013, there are over 14families of patents and patent applications relating to various aspects of the DepoFoam delivery technology. Patents have been issued in numerous countries,with an emphasis on the North American, European and Japanese markets. These patents generally have a term of 20 years from the date of thenonprovisional filing unless referring to an earlier filed application. Some of our U.S. patents have a term from 17 years from the grant date. Our issuedpatents expire at various dates in the future, with the last currently issued patent expiring in 2019.In regards to patents providing protection for EXPAREL, issued patents in the United States relating to the composition of the product candidate andmethods for modifying the rate of drug release of the product candidate expire in September 2018 and January 2017, respectively. A patent relating tocompositions including EXPAREL, but not EXPAREL specifically, expired in November 2013. Pending U.S. applications relating to the composition of theproduct candidate and the process for making the product candidate, if granted, would expire in September 2018 and November 2018, respectively. InEurope, granted patents related to the composition of the product candidate expire in November 2014 and September 2018. Pending applications in Europerelating to methods of modifying the rate of drug release of the product candidate and the process for making the product candidate, if granted, would expire inJanuary 2018 and November 2018, respectively. In April 2010, a provisional patent was filed relating to a new process to manufacture EXPAREL and otherDepoFoam-based products. The process offers many advantages to the current process, including larger scale production and lower manufacturing costs. InApril 2011, we filed a non-provisional patent application which, if granted, could prevent others from using this process until 2031. Furthermore, a non-exclusively licensed patent of ours relating to EXPAREL was allowed in Europe with an expiration date in October 2021 and was extended in the United Statesuntil October 2023.Trade Secrets and Proprietary InformationTrade secrets play an important role in protecting DepoFoam-based products and provide protection beyond patents and regulatory exclusivity. Thescale-up and commercial manufacture of DepoFoam products involves processes, custom equipment and in-process and release analytical techniques that webelieve are unique to us. The expertise and knowledge required to understand the critical aspects of DepoFoam manufacturing steps requires knowledge of bothtraditional and non-traditional emulsion processing and traditional pharmaceutical production, overlaid with all of the challenges presented by asepticmanufacturing. We seek to protect our proprietary information, including our trade secrets and proprietary know-how, by requiring our employees,consultants and other advisors to execute proprietary information and confidentiality agreements upon the commencement of their employment or engagement.These agreements generally provide that all confidential information developed or made known during the course of the relationship with us be keptconfidential and not be disclosed to third parties except in specific circumstances. In the case of our employees, the agreements also typically provide that allinventions resulting from work performed for us, utilizing our property or relating to our business and conceived or completed during employment shall be ourexclusive property to the extent permitted by law. Where appropriate, agreements we obtain with our consultants also typically contain similar assignment ofinvention obligations. Further, we require confidentiality agreements from third parties that receive our confidential data or materials.CompetitionThe pharmaceutical and biotechnology industries are intensely competitive and subject to rapid and significant technological change. Our competitorsinclude organizations such as major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies andgeneric drug companies. Many of our competitors have greater financial and other resources than we have, such as more commercial resources, larger researchand development staffs and more extensive marketing and manufacturing organizations. As a result, these companies may obtain marketing approval morerapidly than we are able and may be more effective in selling and marketing their products. Smaller12Table of Contentsor early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies.Our competitors may succeed in developing, acquiring or licensing on an exclusive basis technologies and drug products that are more effective orless costly than EXPAREL or any other products that we are currently selling through partners or developing or that we may develop, which could render ourproducts obsolete and noncompetitive. We expect any products that we develop and commercialize to compete on the basis of, among other things, efficacy,safety, convenience of administration and delivery, price and the availability of reimbursement from government and other third-party payers. We also expectto face competition in our efforts to identify appropriate collaborators or partners to help commercialize our product candidates in our target commercialmarkets.EXPAREL is competing with elastomeric pump/catheter devices intended to provide bupivacaine over several days. I-FLOW Corporation (acquiredby Kimberly-Clark Corporation in 2009) has marketed these medical devices in the United States since 2004. In addition, we anticipate that EXPAREL willcompete with currently marketed bupivacaine and opioid analgesics such as morphine.Government RegulationFederal Food, Drug and Cosmetic ActPrescription drug products are subject to extensive pre- and post-market regulation by the FDA, including regulations that govern the testing,manufacturing, distribution, safety, efficacy, approval, labeling, storage, record keeping, reporting, advertising and promotion of such products under theFederal Food, Drug and Cosmetic Act, or FDCA, and its implementing regulations, and by comparable agencies and laws in foreign countries. Failure tocomply with applicable FDA or other regulatory requirements may result in, among other things, warning letters, clinical holds, civil or criminal penalties,recall or seizure of products, injunction, debarment, partial or total suspension of production or withdrawal of the product from the market. The FDA mustapprove any new drug, including a new dosage form or new use of a previously approved drug, prior to marketing in the United States. All applications forFDA approval must contain, among other things, information relating to safety and efficacy, pharmaceutical formulation, stability, manufacturing,processing, packaging, labeling and quality control.New Drug ApplicationsGenerally, the FDA must approve any new drug before marketing of the drug occurs in the United States. This process generally involves:•completion of preclinical laboratory and animal testing and formulation studies in compliance with the FDA’s Good Laboratory Practice, orGLP, regulations;•submission to the FDA of an IND application for human clinical testing, which must become effective before human clinical trials may beginin the United States;•approval by an independent institutional review board, or IRB, at each clinical trial site before each trial may be initiated;•performance of human clinical trials, including adequate and well-controlled clinical trials in accordance with good clinical practices, or GCP,to establish the safety and efficacy of the proposed drug product for each intended use;•submission of an NDA to the FDA;•satisfactory completion of an FDA pre-approval inspection of the product’s manufacturing facility or facilities to assess compliance with theFDA’s cGMP regulations, and to ensure that the facilities, methods and controls are adequate to preserve the drug’s identity, quality andpurity;•satisfactory completion of an FDA advisory committee review, if applicable; and•approval by the FDA of the NDA.13Table of ContentsThe preclinical and clinical testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that theFDA will grant approvals for any of our product candidates on a timely basis, if at all. Preclinical tests include laboratory evaluation of product chemistry,formulation and stability, as well as studies to evaluate toxicity in animals. The results of preclinical tests, together with manufacturing information,analytical data and a proposed clinical trial protocol and other information, are submitted as part of an IND application to the FDA. The IND automaticallybecomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the trial on a clinical hold because of, among otherthings, concerns about the conduct of the clinical trial or about exposure of human research subjects to unreasonable health risks. In such a case, the INDsponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Our submission of an IND may not result in FDAauthorization to commence a clinical trial. In addition, the FDA requires to amend an existing IND for each successive clinical trial conducted during productdevelopment. Further, an independent institutional review board, or IRB, covering each medical center proposing to conduct the clinical trial must review andapprove the plan for any clinical trial and informed consent information for subjects before the clinical trial commences at that center, and it must monitor theclinical trial until completed. The FDA, the IRB or the sponsor may suspend a clinical trial at any time, or from time to time, on various grounds, including afinding that the subjects or patients are being exposed to an unacceptable health risk.Clinical trials involve the administration of the investigational new drug to human subjects under the supervision of qualified investigators inaccordance with GCP requirements, which include the requirement that all research subjects provide their informed consent for their participation in anyclinical trial. For purposes of an NDA submission and approval, typically, the conduct of human clinical trials occurs in the following three pre-marketsequential phases, which may overlap:•Phase 1: sponsors initially conduct clinical trials in a limited population to test the product candidate for safety, dose tolerance, absorption,metabolism, distribution and excretion in healthy humans or, on occasion, in patients, such as cancer patients.•Phase 2: sponsors conduct clinical trials generally in a limited patient population to identify possible adverse effects and safety risks, todetermine the efficacy of the product for specific targeted indications and to determine dose tolerance and optimal dosage. Sponsors mayconduct multiple Phase 2 clinical trials to obtain information prior to beginning larger and more extensive Phase 3 clinical trials.•Phase 3: these include expanded controlled and uncontrolled trials, including pivotal clinical trials. When Phase 2 evaluations suggest theeffectiveness of a dose range of the product and acceptability of such product’s safety profile, sponsors undertake Phase 3 clinical trials inlarger patient populations to obtain additional information needed to evaluate the overall benefit and risk balance of the drug and to provide anadequate basis to develop labeling.In addition, sponsors may elect to conduct, or be required by the FDA to conduct, post-approval clinical trials to further assess the drug’s safety oreffectiveness after NDA approval. Such post approval trials are typically referred to as Phase 4 clinical trials.Sponsors submit the results of product development, preclinical studies and clinical trials to the FDA as part of an NDA. NDAs must also containextensive information relating to the product’s pharmacology, chemistry, manufacture, controls and proposed labeling, among other things. In addition,505(b)(2) applications must contain a patent certification for each patent listed in FDA’s “Orange Book” that covers the drug referenced in the application andupon which the third-party studies were conducted. For some drugs, the FDA may require risk evaluation and mitigation strategies, or REMS, which couldinclude medication guides, physician communication plans, or restrictions on distribution and use, such as limitations on who may prescribe the drug orwhere it may be dispensed or administered. Upon receipt, the FDA has 60 days to determine whether the NDA is sufficiently complete to initiate a substantivereview. If the FDA identifies deficiencies that would preclude substantive review, the FDA will refuse to accept the NDA and will inform the sponsor of thedeficiencies that must be corrected prior to resubmission. If the FDA accepts the submission for substantive review, the FDA typically reviews the NDA inaccordance with established timeframes. Under PDUFA, the FDA agrees to specific goals for NDA review time through a two-tiered classification system,Priority Review and Standard Review. A Priority Review designation is given to drugs that offer major advances in treatment, or provide a treatment where noadequate therapy exists. For a Priority Review application, the FDA aims to complete the initial review cycle for New Molecular Entities , or NMEs, within sixmonths of the 60 day filing date, and for Non-NMEs within six months of the date of receipt. Standard Review applies to all applications that are not eligiblefor Priority Review. The FDA aims to complete Standard Review NDAs for NMEs within ten-months of the 60 day filing date, and for Non-NMEs within tenmonths of the date of receipt. Review processes often extend significantly beyond anticipated completion dates due to FDA requests for additional informationor clarification, difficulties scheduling an advisory committee meeting, negotiations regarding REMS, or FDA workload issues. The FDA may refer theapplication to an advisory committee14Table of Contentsfor review, evaluation and recommendation as to the application’s approval. The recommendations of an advisory committee do not bind the FDA, but theFDA generally follows such recommendations.Under PDUFA, NDA applicants must pay significant NDA user fees upon submission. In addition, manufacturers of approved prescription drugproducts must pay annual establishment and product user fees.Before approving an NDA, the FDA may inspect the facility or facilities where the product is manufactured. The FDA will not approve anapplication unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and are adequate to ensureconsistent production of the product within required specifications. Additionally, the FDA will typically inspect one or more clinical sites to ensure compliancewith GCP before approving an NDA.After the FDA evaluates the NDA and the manufacturing facilities, it may issue an approval letter or a Complete Response Letter, or CRL, to indicatethat the review cycle for an application is complete and that the application is not ready for approval. CRLs generally outline the deficiencies in the submissionand may require substantial additional testing or information in order for the FDA to reconsider the application. Even if such additional information issubmitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data from clinical trials are not always conclusive and theFDA may interpret data differently than we do. The FDA could also require a REMS plan to mitigate risks, which could include medication guides, physiciancommunication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDAalso may condition approval on, among other things, changes to proposed labeling, a commitment to conduct one or more post-market studies or clinical trialsand the correction of identified manufacturing deficiencies, including the development of adequate controls and specifications. If and when the deficiencieshave been addressed to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drugwith specific prescribing information for specific indications.Section 505(b)(2) New Drug ApplicationsAs an alternate path to FDA approval, particularly for modifications to drug products previously approved by the FDA, an applicant may submitan NDA under Section 505(b)(2) of the FDCA. Section 505(b)(2) was enacted as part of the Drug Price Competition and Patent Term Restoration Act of1984, also known as the Hatch-Waxman Act, and permits the submission of an NDA where at least some of the information required for approval comesfrom clinical trials not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The FDA interpretsSection 505(b)(2) of the FDCA to permit the applicant to rely upon the FDA’s previous findings of safety and effectiveness for an approved product. TheFDA may also require companies to perform additional clinical trials or measurements to support any change from the previously approved product. The FDAmay then approve the new product candidate for all or some of the label indications for which the referenced product has been approved, as well as for anynew indication sought by the Section 505(b)(2) applicant.Section 505(b)(2) applications are subject to any non-patent exclusivity period applicable to the referenced product, which may delay approval of the505(b)(2) application even if FDA has completed its substantive review and determined the drug should be approved. In addition, 505(b)(2) applicationsmust include patent certifications to any patents listed in the Orange Book as covering the referenced product. If the 505(b)(2) applicant seeks to obtainapproval before the expiration of an applicable listed patent, the 505(b)(2) applicant must provide notice to the patent owner and NDA holder of the referencedproduct. If the patent owner or NDA holder bring a patent infringement lawsuit within 45 days of such notice, the 505(b)(2) application cannot be approvedfor 30 months or until the 505(b)(2) applicant prevails, whichever is sooner. If the 505(b)(2) applicant loses the patent infringement suit, FDA may notapprove the 505(b)(2) application until the patent expires, plus any period of pediatric exclusivity.In the NDA submissions for our product candidates, we intend to follow the development and approval pathway permitted under the FDCA that webelieve will maximize the commercial opportunities for these product candidates.Post-Approval RequirementsAfter approval, the NDA sponsor must comply with comprehensive requirements governing, among other things, drug listing, recordkeeping,manufacturing, marketing activities, product sampling and distribution, annual reporting and adverse event reporting. There are also extensive U.S. DrugEnforcement Agency, or DEA, regulations applicable to marketed controlled substances.If new safety issues are identified following approval, the FDA can require the NDA sponsor to revise the approved labeling to reflect the new safetyinformation; conduct post-market studies or clinical trials to assess the new safety15Table of Contentsinformation; and implement a REMS program to mitigate newly-identified risks. The FDA may also require post-approval testing, including Phase 4 studies,and surveillance programs to monitor the effect of approved products which have been commercialized, and the FDA has the authority to prevent or limitfurther marketing of a product based on the results of these post-marketing programs. Drugs may be marketed only for approved indications and inaccordance with the provisions of the approved label. Further, if we modify a drug, including any changes in indications, labeling or manufacturing processesor facilities, the FDA may require us to submit and obtain FDA approval of a new or supplemental NDA, which may require us to develop additional data orconduct additional preclinical studies and clinical trials.In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register theirestablishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance withcGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDAregulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon us and anythird-party manufacturers that we may decide to use.If after approval the FDA determines that the product does not meet applicable regulatory requirements or poses unacceptable safety risks, the FDAmay take other regulatory actions, including initiating suspension or withdrawal of the NDA approval. Later discovery of previously unknown problems witha product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatoryrequirements, may result in, among other things: •restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;•fines, warning letters or holds on post-approval clinical trials;•refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of product licenseapprovals;•product seizure or detention, or refusal to permit the import or export of products; or•injunctions or the imposition of civil or criminal penalties.The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. These regulations includestandards and restrictions for direct-to-consumer advertising, industry-sponsored scientific and educational activities, promotional activities involving theinternet, and off-label promotion. While physicians may prescribe for off-label uses, manufacturers may only promote for the approved indications and inaccordance with the provisions of the approved label. The FDA has very broad enforcement authority under the FDCA, and failure to abide by theseregulations can result in penalties, including the issuance of a warning letter directing entities to correct deviations from FDA standards, a requirement thatfuture advertising and promotional materials be pre-cleared by the FDA, and state and federal civil and criminal investigations and prosecutions.In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulatesthe distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by thestates. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountabilityin distribution, including a drug pedigree which tracks the distribution of prescription drugs.International RegulationIn addition to regulations in the United States, we are subject to a variety of foreign regulations governing clinical trials and the commercial sales anddistribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval by the comparable regulatory authorities offoreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country,and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing,pricing and reimbursement vary greatly from country to country.16Table of ContentsFor example, in the European Economic Area, or EEA (which is comprised of the 27 Member States of the EU plus Norway, Iceland andLiechtenstein), medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types of marketingauthorizations:•The Community MA, which is issued by the European Commission through the Centralized Procedure, based on the opinion of theCommittee for Medicinal Products for Human Use, or CHMP, of the EMA, and which is valid throughout the entire territory of the EEA. TheCentralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, andmedicinal products containing a new active substance indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in theEEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health inthe EU.•National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, areavailable for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized formarketing in a Member State of the EEA (the Reference Member State, or RMS), this National MA can be recognized in other Member States(the Concerned Member States, or CMS) through the Mutual Recognition Procedure. If the product has not received a National MA in anyMember State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure.Under the Decentralized Procedure, an identical dossier is submitted to the competent authorities of each of the Member States in which theMA is sought, one of which is selected by the applicant as the RMS. The competent authority of the RMS prepares a draft assessment report,a draft summary of the product characteristics, or SPC, and a draft of the labeling and package leaflet, which are sent to the CMS for theirapproval. If the CMS raise no objections, based on a potential serious risk to public health, to the assessment, SPC, labeling, or packagingproposed by the RMS, the product is subsequently granted a national MA in all the Member States (i.e. in the RMS and the CMS). If one ormore CMS raise objections based on a potential serious risk to public health, the application is referred to the Coordination group for Mutualrecognition and Decentralized procedure for human medicinal products, or CMDh, which is composed of representatives of the EEA MemberStates. If a consensus cannot be reached within the CMDh the matters is referred for arbitration to the CHMP, which can reach a finaldecision binding on all EEA Member States. A similar process applies to disputes between the RMS and the CMS in the Mutual RecognitionProcedure.As with FDA approval, we may not be able to secure regulatory approvals in Europe in a timely manner, if at all. Additionally, as in the UnitedStates, post-approval regulatory requirements, such as those regarding product manufacture, marketing, or distribution, would apply to any product that isapproved in Europe, and failure to comply with such obligations could have a material adverse effect on our ability to successfully commercialize anyproduct.The conduct of clinical trials in the EU is governed by the EU Clinical Trials Directive (Directive 2001/20/EC of 4 April 2001, of the EuropeanParliament and of the Council on the approximation of the laws, regulations and administrative provisions of the Member States relating to implementation ofgood clinical practice in the conduct of clinical trials on medicinal products for human use). The provisions of the EU Clinical Trials Directive were requiredto be implemented and applied by the EEA Member States before May 2004. The EU Clinical Trials Directive harmonizes the regulatory requirements of theMember States of the EEA for the conduct of clinical trials in their respective territories. The EU Clinical Trials Directive requires sponsors of clinical trials tosubmit formal applications to, and to obtain the approval of, national ethics committees and regulatory authorities prior to the initiation of clinical trials.In addition to regulations in Europe and the United States, we will be subject to a variety of foreign regulations governing clinical trials andcommercial distribution of any future products.Third Party Payer Coverage and ReimbursementThe commercial success of our products and product candidates will depend, in part, upon the availability of coverage and reimbursement fromthird-party payers at the federal, state and private levels. Government payer programs, including Medicare and Medicaid, private health care insurancecompanies and managed care plans may deny coverage or reimbursement for a product or therapy in whole or in part if they determine that the product ortherapy is not medically appropriate or necessary. Also, third-party payers have attempted to control costs by limiting coverage and the amount ofreimbursement for particular procedures or drug treatments. The United States Congress and state legislatures from time to time propose and adopt17Table of Contentsinitiatives aimed at cost containment, which could impact our ability to sell our products at a price level high enough to realize an appropriate return on ourinvestment.For example, in March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care andEducation Affordability Reconciliation Act, which we refer to collectively as the Health Care Reform Law, a sweeping law intended to broaden access to healthinsurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements forhealthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The Health CareReform Law revised the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates owed tostates by pharmaceutical manufacturers for covered outpatient drugs. The Health Reform Law also established a new Medicare Part D coverage gap discountprogram, in which drug manufacturers must provide 50% point-of-sale discounts on products covered under Part D beginning in 2011. Further, alsobeginning in 2011, the new law imposed a significant annual, nondeductible fee on companies that manufacture or import branded prescription drugproducts. Substantial new provisions affecting compliance have also been enacted, which may require us to modify our business practices with healthcarepractitioners. Some details of the Health Care Reform Law are yet to be determined, as applicable federal and state agencies must issue regulations or guidanceunder the new law. Although it is too early to determine the effect of the Health Care Reform Law, the new law appears likely to continue the pressure onpharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs. Moreover, in the comingyears, additional changes could be made to governmental healthcare programs that could significantly impact the success of our products.In addition, other legislative changes have been proposed and adopted since the Health Care Reform Law was enacted, which could result inreductions in Medicare payments to providers. The full impact on our business of these legislative actions is uncertain. Nor is it clear whether other legislativechanges will be adopted, if any, or how such changes would affect the demand for our products.The cost of pharmaceuticals continues to generate substantial governmental and third-party payer interest. We expect that the pharmaceutical industrywill experience pricing pressures due to the trend toward managed healthcare, the increasing influence of managed care organizations and additional legislativeproposals. Our results of operations could be adversely affected by current and future healthcare reforms. Ongoing federal and state government initiativesdirected at lowering the total cost of health care will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reformof the Medicare and Medicaid payment systems. Examples of how limits on drug coverage and reimbursement in the United States may cause reducedpayments for drugs in the future include:•changing Medicare reimbursement methodologies;•fluctuating decisions on which drugs to include in formularies;•revising covered outpatient drug rebate calculations under the Medicaid program; and•reforming drug importation laws.Some third-party payers also require pre-approval of coverage for new or innovative devices or drug therapies before they will reimburse healthcareproviders that use such therapies or place limits on the amount of reimbursement. While we cannot predict whether any proposed cost-containment measureswill be adopted or otherwise implemented in the future, the announcement or adoption of these proposals could have a material adverse effect on our ability toobtain adequate prices for our product candidates and to operate at a reasonable return on investment.In international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted priceceilings on specific products and therapies. There can be no assurance that our products will be considered medically reasonable and necessary for a specificindication, that our products will be considered cost-effective by third-party payers, or that an adequate level or reimbursement will be available so that thethird-party payers’ reimbursement policies will not adversely affect our ability to sell our products profitably.Marketing/Data ExclusivityThe FDA may grant three or five years of marketing exclusivity in the United States for the approval of new or supplemental NDAs, includingSection 505(b)(2) NDAs, for, among other things, new indications, dosages or dosage forms of an existing drug, if new clinical investigations that wereconducted or sponsored by the applicant are essential to the approval18Table of Contentsof the application. Additionally, six months of marketing exclusivity in the United States is available under Section 505A of the FDCA if, in response to awritten request from the FDA, a sponsor submits and the agency accepts requested information relating to the use of the approved drug in the pediatricpopulation. This six month pediatric exclusivity period is not a standalone exclusivity period, but rather is added to any existing patent or non-patentexclusivity period for which the drug product is eligible. Based on our clinical trial program for EXPAREL, FDA granted three years of marketing exclusivityto EXPAREL, which expires on October 28, 2014.Manufacturing RequirementsWe must comply with applicable FDA regulations relating to the FDA’s cGMP regulations. The cGMP regulations include requirements relating toorganization of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and processcontrols, packaging and labeling controls, holding and distribution, laboratory controls, records and reports, and returned or salvaged products. Themanufacturing facilities for our products must meet cGMP requirements to the satisfaction of the FDA pursuant to a pre-approval inspection before we can usethem to manufacture our products. We and any third-party manufacturers are also subject to periodic inspections of facilities by the FDA and otherauthorities, including procedures and operations used in the testing and manufacture of our products to assess our compliance with applicable regulations.Failure to comply with these and other statutory and regulatory requirements subjects a manufacturer to possible legal or regulatory action, including warningletters, the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations and civil andcriminal penalties. Adverse experiences with the product must be reported to the FDA and could result in the imposition of market restrictions through labelingchanges or in product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerningsafety or efficacy of the product occur following approval.Healthcare Fraud and Abuse LawsWe are subject to various federal, state and local laws targeting fraud and abuse in the healthcare industry. For example, in the United States, thereare federal and state anti-kickback laws that prohibit the offer, payment or receipt of kickbacks, bribes or other remuneration intended to induce the purchaseor recommendation of healthcare products and services or reward purchases or recommendations. Violations of these laws can lead to civil and criminalpenalties, including fines, imprisonment and exclusion from participation in federal healthcare programs. These laws are potentially applicable tomanufacturers of products regulated by the FDA and reimbursed by federal healthcare programs, such as us, and to hospitals, physicians and other potentialpurchasers of such products.In particular, the federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or providingremuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, forwhich payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. The term “remuneration” is not defined in thefederal Anti-Kickback Statute and has been broadly interpreted to include anything of value, including gifts, discounts, the provision of goods and services,the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payments, ownership interests and providing anything at lessthan its fair market value. In addition, the Health Care Reform Law, among other things, amends the intent requirement of the federal Anti-Kickback Statuteand the applicable criminal healthcare fraud statutes contained within 42 U.S.C. § 1320a-7b. Pursuant to the statutory amendment, a person or entity nolonger needs to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, the Health Care ReformLaw provides that the federal government may assert that a reimbursement claim for items or services resulting from a violation of 42 U.S.C. § 1320a-7bconstitutes a false or fraudulent claim for purposes of the civil False Claims Act (discussed below) or the civil monetary penalties statute, which imposes apenalty of $5,000 against any person who is determined to have presented or caused to be presented claims to a federal health care program that the personknows or should know is for an item or service that was not provided as claimed or is false or fraudulent. Moreover, the lack of uniform court interpretationof the Anti-Kickback Statute makes compliance with the law difficult.Recognizing that the federal Anti-Kickback Statute is broad and may prohibit innocuous or beneficial arrangements within the healthcare industry,the statute establishes certain exemptions from the statutory prohibition and authorizes additional exemptions by regulation. Pursuant to this authority, theU.S. Department of Health and Human Services’ Office of Inspector General, or OIG, issued regulations in July of 1991, and periodically since that time,which the OIG refers to as “safe harbors.” These safe harbor regulations set forth certain provisions which, if met in form and substance, will assurepharmaceutical companies, healthcare providers and other parties that they will not be prosecuted under the federal Anti-Kickback Statute. Although fullcompliance with these provisions ensures against prosecution under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit withina specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Statute willbe pursued. However,19Table of Contentsconduct and business arrangements that do not fully satisfy an applicable safe harbor may result in increased scrutiny by government enforcementauthorities, such as the OIG or federal prosecutors. Additionally, there are certain statutory exceptions to the federal Anti-Kickback Statute, one or more ofwhich could be used to protect a business arrangement, although we understand that OIG is of the view that an arrangement that does not meet therequirements of a regulatory safe harbor does not satisfy the corresponding statutory exception, if any, under the federal Anti-Kickback Statute.Additionally, many states have adopted laws similar to the federal Anti-Kickback Statute. Some of these state prohibitions apply to referral ofpatients for healthcare items or services reimbursed by any third-party payer, not only the Medicare and Medicaid programs, and do not contain identical safeharbors. Government officials have focused their enforcement efforts on marketing of healthcare services and products, among other activities, and havebrought cases against numerous pharmaceutical and medical device companies, and certain sales and marketing personnel for allegedly offering unlawfulinducements to potential or existing customers in an attempt to procure their business or reward past purchases or recommendations.Another development affecting the healthcare industry is the increased use of the federal civil False Claims Act and, in particular, actions broughtpursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The civil False Claims Act imposes liability on any person or entity who, amongother things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam provisionsof the False Claims Act allow a private individual to bring civil actions on behalf of the federal government alleging that the defendant has submitted a falseclaim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought by private individuals has increaseddramatically. In addition, various states have enacted false claim laws analogous to the False Claims Act. When an entity is determined to have violated theFalse Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of $5,500 to $11,000 foreach separate false claim. There are many potential bases for liability under the False Claims Act. Liability arises, primarily, when an entity knowinglysubmits, or causes another to submit, a false claim for reimbursement to the federal government. The False Claims Act has been used to assert liability on thebasis of inadequate care, kickbacks and other improper referrals, improperly reported government pricing metrics such as Best Price or Average ManufacturerPrice, improper use of Medicare numbers when detailing the provider of services, improper promotion of off-label uses (i.e., uses not expressly approved bythe FDA in a drug’s label), and allegations as to misrepresentations with respect to the services rendered. Our activities relating to the reporting of discount andrebate information and other information affecting federal, state and third-party reimbursement of our products, and the sale and marketing of our productsand our service arrangements or data purchases, among other activities, may be subject to scrutiny under these laws. We are unable to predict whether wewould be subject to actions under the False Claims Act or a similar state law, or the impact of such actions. However, the cost of defending such claims, aswell as any sanctions imposed, could adversely affect our financial performance.Also, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, created several new federal crimes, including health care fraud,and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private third-party payers. The false statements statute prohibits knowingly and willfully falsifying, concealing or coveringup a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits,items or services.In addition, under California law, pharmaceutical companies must adopt a comprehensive compliance program that is in accordance with both theApril 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers, or OIG Guidance, and the Pharmaceutical Researchand Manufacturers of America Code on Interactions with Healthcare Professionals, or the PhRMA Code. The PhRMA Code seeks to promote transparency inrelationships between health care professionals and the pharmaceutical industry and to ensure that pharmaceutical marketing activities comport with thehighest ethical standards. The PhRMA Code contains strict limitations on certain interactions between health care professionals and the pharmaceuticalindustry relating to gifts, meals, entertainment and speaker programs, among others. Also, certain states, such as Massachusetts, Minnesota, Vermont andothers, have imposed restrictions on the types of interactions that pharmaceutical and medical device companies or their agents (e.g., sales representatives) mayhave with health care professionals, including bans or strict limitations on the provision of meals, entertainment, hospitality, travel and lodging expenses, andother financial support, including funding for continuing medical education activities.Healthcare Privacy and Security LawsWe may be subject to, or our marketing activities may be limited by, HIPAA, and its implementing regulations, which established uniformstandards for certain “covered entities” (healthcare providers, health plans and healthcare clearinghouses) governing the conduct of certain electronic healthcaretransactions and protecting the security and privacy of protected health20Table of Contentsinformation. The American Recovery and Reinvestment Act of 2009, commonly referred to as the economic stimulus package, included sweeping expansion ofHIPAA’s privacy and security standards called the Health Information Technology for Economic and Clinical Health Act, or HITECH, which became effectiveon February 17, 2010. Among other things, the new law makes HIPAA’s privacy and security standards directly applicable to “business associates”-independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of acovered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly otherpersons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws andseek attorney’s fees and costs associated with pursuing federal civil actions.Environmental MattersOur research and development processes and our manufacturing processes involve the controlled use of hazardous materials, chemicals and producewaste products. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardousmaterials and waste products. We do not expect the cost of complying with these laws and regulations to be material. While we believe we are in compliancewith applicable environmental regulations, the failure to fully comply with any such regulations could result in the imposition of penalties, fines and/orsanctions which could have a material adverse effect on our business.EmployeesAs of December 31, 2013, we had 310 employees, of which two were part-time. All of our employees are located in the United States. None of ouremployees are represented by a labor union, and we consider our current employee relations to be good.Available InformationWe file reports and other information with the SEC as required by the Exchange Act. We make available free of charge through our website(http://www.pacira.com) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filedor furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act. We make these reports available through our website as soon as reasonably practicableafter we electronically file such reports with, or furnish such reports to, the SEC. In addition, we regularly use our website to post information regarding ourbusiness, product development programs and governance, and we encourage investors to use our website, particularly the information in the section entitled“Investors & Media,” as a source of information about us. The foregoing references to our website are not intended to, nor shall they be deemed to, incorporateinformation on our website into this Annual Report on Form 10-K by reference.Item 1A. Risk Factors In addition to the other information in this Annual Report on Form 10-K, any of the factors set forth below could significantly and negatively affect ourbusiness, financial condition, results of operations or prospects. The trading price of our common stock may decline due to these risks. This section containsforward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 1.Risks Related to the Development and Commercialization of Our Product CandidatesOur success depends on our ability to successfully commercialize EXPAREL. We have invested a significant portion of our efforts and financial resources in the development and commercialization of our lead product, EXPAREL,which was approved by the FDA on October 28, 2011 and commercially launched in April 2012. During 2013, sales of EXPAREL constituted a significantportion of our total revenue, and our success depends on our ability to continue to effectively commercialize EXPAREL. Our ability to effectively generaterevenues from EXPAREL will depend on our ability to, among other things:•create market demand for EXPAREL through our marketing and sales activities and other arrangements established for the promotion ofEXPAREL; •train, deploy and support a qualified sales force; •secure formulary approvals for EXPAREL at a substantial number of targeted hospitals; •manufacture EXPAREL in sufficient quantities in compliance with requirements of the FDA and similar foreign regulatory agencies and atacceptable quality and pricing levels in order to meet commercial demand; 21Table of Contents•implement and maintain agreements with wholesalers, distributors and group purchasing organizations on commercially reasonable terms; •receive adequate levels of coverage and reimbursement for EXPAREL from commercial health plans and governmental health programs; •maintain compliance with regulatory requirements; •obtain regulatory approvals for additional indications for the use of EXPAREL;•ensure that our entire supply chain efficiently and consistently delivers EXPAREL to our customers; and •maintain and defend our patent protection and regulatory exclusivity for EXPAREL. Any disruption in our ability to generate revenues from the sale of EXPAREL will have a material and adverse impact on our results of operations.Our efforts to successfully commercialize EXPAREL are subject to many internal and external challenges and if we cannot overcome thesechallenges in a timely manner, our future revenues and profits could be materially and adversely impacted. EXPAREL has been a marketed drug for less than two years. As a result, we continue to expend significant time and resources to train the sales force tobe credible and persuasive in convincing physicians and hospitals to use EXPAREL. In addition, we also must train the sales force to ensure that a consistentand appropriate message about EXPAREL is delivered to our potential customers. If we are unable to effectively train the sales force and equip them witheffective materials, including medical and sales literature to help them inform and educate potential customers about the benefits and risks of EXPAREL andits proper administration, our efforts to successfully commercialize EXPAREL could be put in jeopardy, which could have a material adverse effect on ourfuture revenues and profits. In addition to our extensive internal efforts, the successful commercialization of EXPAREL will require many third parties, over whom we have nocontrol, to choose to utilize EXPAREL. These third parties include physicians and hospital pharmacy and therapeutics committees, which we refer to as P&Tcommittees. Generally, before we can attempt to sell EXPAREL in a hospital, EXPAREL must be approved for addition to that hospital's list of approveddrugs, or formulary list, by the hospital's P&T committee. A hospital's P&T committee typically governs all matters pertaining to the use of medicationswithin the institution, including the review of medication formulary data and recommendations for the appropriate use of drugs within the institution to themedical staff. The frequency of P&T committee meetings at hospitals varies considerably, and P&T committees often require additional information to aid intheir decision-making process. Therefore, we may experience substantial delays in obtaining formulary approvals. Additionally, hospital pharmacists may beconcerned that the cost of acquiring EXPAREL for use in their institutions will adversely impact their overall pharmacy budgets, which could causepharmacists to resist efforts to add EXPAREL to the formulary, or to implement restrictions on the usage of EXPAREL in order to control costs. We cannotguarantee that we will be successful in obtaining the approvals we need from enough P&T committees quickly enough to optimize hospital sales of EXPAREL. Even if we obtain hospital formulary approval for EXPAREL, physicians must still prescribe EXPAREL for its commercialization to be successful.Because EXPAREL is a relatively new drug with a limited track record of sales in the United States, any inability to timely supply EXPAREL to ourcustomers, or any unexpected side effects that develop from use of the drug, particularly early in product launch, may lead physicians to not acceptEXPAREL as a viable treatment alternative. If EXPAREL does not achieve broad market acceptance, the revenues that we generate from its sales will be limited. The degree of market acceptance ofEXPAREL also depends on a number of other factors, including:•changes in the standard of care for the targeted indications for EXPAREL, which could reduce the marketing impact of any claims that we canmake; •the relative efficacy, convenience and ease of administration of EXPAREL; •the prevalence and severity of adverse events associated with EXPAREL; •cost of treatment versus economic and clinical benefit, both in absolute terms and in relation to alternative treatments; •the availability of adequate coverage or reimbursement by third parties, such as insurance companies and other healthcare payers, and bygovernment healthcare programs, including Medicare and Medicaid; •the extent and strength of our marketing and distribution of EXPAREL;•the safety, efficacy and other potential advantages over, and availability of, alternative treatments, including, in the case of EXPAREL, anumber of products already used to treat pain in the hospital setting; and •distribution and use restrictions imposed by the FDA or to which we agree as part of a mandatory risk evaluation and mitigation strategy orvoluntary risk management plan. Our ability to effectively promote and sell EXPAREL and any product candidates that we may develop, license or acquire in the hospital marketplace willalso depend on pricing and cost effectiveness, including our ability to produce a product at a competitive price and therefore achieve acceptance of the productonto hospital formularies, and our ability to obtain sufficient third-party coverage or reimbursement. Since many hospitals are members of group purchasingorganizations, which leverage22Table of Contentsthe purchasing power of a group of entities to obtain discounts based on the collective buying power of the group, our ability to attract customers in thehospital marketplace will also depend on our ability to effectively promote our product candidates to group purchasing organizations. We will also need todemonstrate acceptable evidence of safety and efficacy, as well as relative convenience and ease of administration. Market acceptance could be further limiteddepending on the prevalence and severity of any expected or unexpected adverse side effects associated with our product candidates. In addition, the labeling approved by the FDA does not contain claims that EXPAREL is safer or more effective than competitive products and does notpermit us to promote EXPAREL as being superior to competing products. Further, the availability of inexpensive generic forms of postsurgical painmanagement products may also limit acceptance of EXPAREL among physicians, patients and third-party payers. If EXPAREL does not achieve an adequatelevel of acceptance among physicians, patients and third-party payers, we may not generate meaningful revenues from EXPAREL and we may not becomeprofitable.We face significant competition from other pharmaceutical and biotechnology companies. Our operating results will suffer if we fail to competeeffectively. The pharmaceutical and biotechnology industries are intensely competitive and subject to rapid and significant technological change. Our majorcompetitors include organizations such as major multinational pharmaceutical companies, established biotechnology companies and specialty pharmaceuticaland generic drug companies. Many of our competitors have greater financial and other resources than we have, such as larger research and development staff,more extensive marketing, distribution, sales and manufacturing organizations and experience, more extensive clinical trial and regulatory experience, expertisein prosecution of intellectual property rights and access to development resources like personnel and technology. As a result, these companies may obtainregulatory approval more rapidly than we are able to and may be more effective in selling and marketing their products. Smaller or early stage companies mayalso prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Our competitors may succeed indeveloping, acquiring or licensing on an exclusive basis technologies and drug products that are more effective or less costly than EXPAREL or any productcandidate that we are currently developing or that we may develop, which could render our products obsolete and noncompetitive or significantly harm thecommercial opportunity for EXPAREL or our product candidates. As a result of these factors, our competitors may obtain patent protection or other intellectual property rights that may limit our ability to develop otherindications for, or commercialize, EXPAREL. Our competitors may also develop drugs that are safer, more effective, useful or less costly than ours and maybe more successful than us in manufacturing and marketing their products. EXPAREL competes with well-established products with similar indications. Competing products available for postsurgical pain management includeopioids such as morphine, fentanyl, meperidine and hydromorphone, each of which is available generically from several manufacturers, and several of whichare available as proprietary products using novel delivery systems. Ketorolac, an injectable non-steroidal anti-inflammatory drug, or NSAID, is also availablegenerically in the United States from several manufacturers, and Caldolor (ibuprofen for injection), an NSAID, has been approved by the FDA for painmanagement and fever in adults. In addition, EXPAREL competes with non-opioid products such as bupivacaine, marcaine, ropivacaine and otheranesthetics/analgesics, all of which are also used in the treatment of postsurgical pain and are available as either oral tablets, injectable dosage forms oradministered using novel delivery systems. Additional products may be developed for the treatment of acute pain, including new injectable NSAIDs, novelopioids, new formulations of currently available opioids and NSAIDs, long-acting local anesthetics and new chemical entities as well as alternative deliveryforms of various opioids and NSAIDs. EXPAREL also competes with elastomeric bag/catheter devices intended to provide bupivacaine over several days. I-FLOW Corporation (acquired byKimberly-Clark Corporation in 2009) has marketed these medical devices in the United States since 2004.If we are unable to establish and maintain effective marketing and sales capabilities or enter into agreements with third parties to market and sellEXPAREL, we may be unable to generate product revenues. We are continuing to build our commercial infrastructure for the marketing, sale and distribution of pharmaceutical products. In order to continuecommercializing EXPAREL effectively, we must continue to build our marketing, sales and distribution capabilities. We entered into an agreement withQuintiles for the outsourcing of our specialty sales force, which we then hired as direct employees in January 2013. The establishment, development andtraining of our sales force and related compliance plans to market EXPAREL is expensive and time consuming. In the event we are not successful indeveloping our marketing and sales infrastructure, we may not be able to successfully commercialize EXPAREL, which would limit our ability to generateproduct revenues.In addition to our internal marketing and sales efforts, we have entered into agreements with third party distributors to promote and sell EXPAREL incertain territories. For example, following a pilot program, effective October 1, 2013, we appointed CrossLink as our exclusive third-party distributor topromote and sell EXPAREL for orthopedic and spine surgeries23Table of Contentsin the U.S., with the exception of certain geographical areas and accounts, for a five year term. We may seek additional distribution arrangements in thefuture, including arrangements with third party distributors to commercialize and sell EXPAREL in certain foreign countries. The use of distributors involvescertain risks, including risks that such distributors will:•not effectively distribute or support our products;•not provide us with accurate or timely information regarding their inventories, the number of accounts using our products or complaints aboutour products;•fail to comply with their obligations to us;•fail to comply with laws and regulations to which they are subject, whether in the U.S. or in foreign jurisdictions;•reduce or discontinue their efforts to sell or promote our products; or•cease operations.Any such failure may result in decreased sales, which would have an adverse effect on our business.We rely on third parties to perform many essential services for EXPAREL and any other products that we commercialize, including services relatedto customer service support, warehousing and inventory program services, distribution services, contract administration and chargebackprocessing services, accounts receivable management and cash application services, and financial management and information technologyservices. If these third parties fail to perform as expected or to comply with legal and regulatory requirements, our ability to commercializeEXPAREL will be significantly impacted and we may be subject to regulatory sanctions. We have entered into agreements with third-party service providers to perform a variety of functions related to the sale and distribution of EXPAREL, keyaspects of which are out of our direct control. These service providers provide key services related to customer service support, warehousing and inventoryprogram services, distribution services, contract administration and chargeback processing services, accounts receivable management and cash applicationservices, and financial management and information technology services. In addition, most of our inventory is stored at a single warehouse maintained by onesuch service provider. We substantially rely on these providers as well as other third-party providers that perform services for us, including entrusting ourinventories of products to their care and handling. If these third-party service providers fail to comply with applicable laws and regulations, fail to meetexpected deadlines, or otherwise do not carry out their contractual duties to us, or encounter physical or natural damage at their facilities, our ability to deliverproduct to meet commercial demand would be significantly impaired. In addition, we may engage third parties to perform various other services for us relatingto adverse event reporting, safety database management, fulfillment of requests for medical information regarding our product candidates and related services.If the quality or accuracy of the data maintained by these service providers is insufficient, we could be subject to regulatory sanctions. Distribution of our DepoFoam-based products, including EXPAREL, requires cold-chain distribution provided by third parties, whereby the productmust be maintained between specified temperatures. We and our partners have utilized similar cold-chain processes for DepoCyt(e) and DepoDur. If a problemoccurs in our cold-chain distribution processes, whether through our failure to maintain our products or product candidates between specified temperatures orbecause of a failure of one of our distributors or partners to maintain the temperature of the products or product candidates, the product or product candidatecould be adulterated and rendered unusable. We have obtained limited inventory and cargo insurance coverage for our products. However, our insurancecoverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. This could have a material adverse effect onour business, financial condition, results of operations and reputation.We will need to increase the size of our organization and effectively manage our sales force, and we may experience difficulties in managinggrowth. As of December 31, 2013, we had 310 employees. We may need to expand our personnel resources in order to manage our operations and sales ofEXPAREL. Our management, personnel, systems and facilities currently in place may not be adequate to support this future growth. In addition, we may notbe able to recruit and retain qualified personnel in the future, particularly marketing positions, due to competition for personnel among pharmaceuticalbusinesses, and the failure to do so could have a significant negative impact on our future product revenues and business results. Our need to effectivelymanage our operations, growth and various projects requires that we:•continue the hiring and training of an effective commercial organization for the commercialization of EXPAREL, and establish appropriatesystems, policies and infrastructure to support that organization; •continue to establish and maintain effective relationships with distributors and commercial partners for the promotion and sale of our products;•ensure that our distributors, partners, suppliers, consultants and other service providers successfully carry out their contractual obligations,provide high quality results, and meet expected deadlines; •manage our development efforts and clinical trials effectively;•expand our manufacturing capabilities;24Table of Contents•continue to carry out our own contractual obligations to our licensors and other third parties; and •continue to improve our operational, financial and management controls, reporting systems and procedures. We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our development and commercializationgoals. Additionally, these tasks may impose a strain on our administrative and operational infrastructure. If we are unable to effectively manage our growth,our product sales and resulting revenues will be negatively impacted.We may not be able to manage our business effectively if we are unable to attract and retain key personnel. We may not be able to attract or retain qualified management and commercial, scientific and clinical personnel due to the intense competition for qualifiedpersonnel among biotechnology, pharmaceutical and other businesses, as well as universities, non-profit research organizations and government entities,particularly in the San Diego, California and northern New Jersey areas. If we are not able to attract and retain necessary personnel to accomplish our businessobjectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capitaland our ability to implement our business strategy. Our industry has experienced a high rate of turnover of management personnel in recent years. We are highly dependent on the development andmanufacturing expertise for our DepoFoam delivery technology and the commercialization expertise of certain members of our senior management. Inparticular, we are highly dependent on the skills and leadership of our management team, including David Stack, our president, chief executive officer andchairman. If we lose one or more of these key employees, our ability to successfully implement our business strategy could be seriously harmed. Replacingkey employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth ofskills and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire from this limited pool isintense, and we may be unable to hire, train, retain or motivate additional key personnel. Mr. Stack, our president, chief executive officer and chairman is also a managing director at MPM Capital and a managing partner of StackPharmaceuticals, Inc. Although Mr. Stack has devoted substantially all of his business time to our company over the past 12 months, Mr. Stack'sresponsibilities at MPM Capital and Stack Pharmaceuticals, Inc. might require that he spend less than all his business time managing our company in thefuture. Under our consulting agreement with Gary Patou, M.D., our chief medical officer, he is not required to devote all of his business time to our company.We cannot assure you that Dr. Patou's business time commitment to us will be sufficient to perform the duties of our chief medical officer.We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for DepoCyt(e),EXPAREL or product candidates that we may develop and may have to limit their commercialization. The use of DepoCyt(e), EXPAREL and any product candidates that we may develop, license or acquire in clinical trials and the sale of any products forwhich we obtain regulatory approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers,health care providers or others using, administering or selling our products. If we cannot successfully defend ourselves against these claims, we will incursubstantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:•loss of revenue from decreased demand for our products and/or product candidates; •impairment of our business reputation or financial stability; •costs of related litigation; •substantial monetary awards to patients or other claimants; •diversion of management attention; •loss of revenues; •withdrawal of clinical trial participants and potential termination of clinical trial sites or entire clinical programs; and •the inability to commercialize our product candidates. We have obtained limited product liability insurance coverage for our products and our clinical trials with a $10.0 million annual aggregate coveragelimit. However, our insurance coverage may not reimburse us, or may not be sufficient to reimburse us, for any expenses or losses we may suffer. Moreover,insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage on acceptable terms, at areasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of additionalcommercial products upon FDA approval for our product candidates in development, but we may be unable to obtain commercially reasonable productliability insurance for any products approved for marketing, or at all. On occasion, large judgments have been awarded in class action lawsuits based ondrugs that had unanticipated side effects. A successful product25Table of Contentsliability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease ourcash and adversely affect our business.If we fail to manufacture EXPAREL in sufficient quantities and at acceptable quality and pricing levels, or to fully comply with cGMP regulations,we may face delays in the commercialization of this product or be unable to meet market demand, and may lose potential revenues. The manufacture of EXPAREL requires significant expertise and capital investment, including the development of advanced manufacturing techniquesand process controls, and the use of specialized processing equipment. We must comply with federal, state and foreign regulations, including the FDA'sregulations governing cGMP, enforced by the FDA through its facilities inspection program and by similar regulatory authorities in other jurisdictions wherewe do business. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. TheFDA or similar foreign regulatory authorities at any time may implement new standards, or change their interpretation and enforcement of existing standardsfor manufacture, packaging or testing of our products. Any failure to comply with applicable regulations may result in fines and civil penalties, suspension ofproduction, product seizure or recall, operating restrictions, imposition of a consent decree, modification or withdrawal of product approval, or criminalprosecution, and would limit the availability of our product. Any manufacturing defect or error discovered after products have been produced and distributedalso could result in significant consequences, including costly recall procedures, re-stocking costs, damage to our reputation and potential for product liabilityclaims. If we are unable to produce the required commercial quantities of EXPAREL to meet market demand for EXPAREL on a timely basis or at all, or if wefail to comply with applicable laws for the manufacturing of EXPAREL, we will suffer damage to our reputation and commercial prospects and we will losepotential revenues.We will need to expand our manufacturing operations or outsource such operations to third parties. To successfully meet future customer demand for EXPAREL, we will need to expand our existing commercial manufacturing facilities or establish large-scale commercial manufacturing capabilities. In addition, as our drug development pipeline increases and matures, we will have a greater need for clinical trialand commercial manufacturing capacity. As a result, we must continue to improve our manufacturing processes to allow us to reduce our drug costs. We maynot be able to manufacture our drugs at a cost or in quantities necessary to be commercially successful. The build-up or other expansion of our internal manufacturing capabilities for EXPAREL production in San Diego, California exposes us to significantup-front fixed costs. If market demand for EXPAREL does not align with our expanded manufacturing capacity, we may be unable to offset these costs and toachieve economies of scale, and our operating results may be adversely affected as a result of high operating expenses. Alternatively, if we experience demandfor EXPAREL in excess of our estimates, our facilities may be insufficient to support higher production volumes, which could harm our customerrelationships and overall reputation. Our ability to meet such excess demand could also depend on our ability to raise additional capital and effectively scaleour manufacturing operations. In addition, the procurement time for the equipment that we use to manufacture EXPAREL requires long lead times. Therefore, we may experience delays,additional or unexpected costs and other adverse events in connection with our capacity expansion projects, including those associated with potential delays inthe procurement of manufacturing equipment required to manufacture EXPAREL.In addition to expanding our internal manufacturing facilities, we may enter into arrangements with third parties to manufacture, supply, test and/or storeEXPAREL or our other products. Entering into such arrangements requires testing and compliance inspections, FDA approvals, and development of theprocesses necessary for the production of our products. Such arrangements also involve additional risks, many of which would be outside of our control.Such risks include disruptions or delays in production, manufactured products that do not meet our required specifications, the failure of such third partymanufacturers to comply with cGMP regulations or other regulatory requirements, protection of our intellectual property and manufacturing process, loss ofcontrol of our complex manufacturing process, financial risks in connection with our investment in setting up a third party manufacturing process andinabilities to fulfill our commercial needs. If we are unable to achieve and maintain satisfactory production yields and quality, whether through our internal manufacturing capabilities orarrangements with contract manufacturers, our relationships with potential customers and overall reputation may be harmed, and our revenues could decrease.We are currently the sole manufacturer of EXPAREL and DepoCyt(e). Our inability to continue manufacturing adequate supplies of theseproducts could result in a disruption in the supply to our customers and partners, which could have a material adverse impact on our businessand results of operations. We are currently the sole manufacturer of EXPAREL and DepoCyt(e). We develop and manufacture EXPAREL and DepoCyt(e) at our facilities in SanDiego, California, which are the only FDA approved sites for manufacturing EXPAREL and DepoCyt(e) in the world. We may experience temporary orprolonged suspensions in production of our products due to issues26Table of Contentsin our manufacturing process that must be remediated or in response to inspections conducted by the FDA or similar foreign regulatory authorities, whichcould have a material adverse effect on our business, financial position and results of operations.For example, in 2012 we temporarily ceased the manufacturing of DepoCyt(e) for sales in the European Union to implement a remediation plan to addresscertain issues noted in an inspection report issued by the the Medicines and Healthcare products Regulatory Agency, or MHRA, in July 2012 regarding ourDepoCyt(e) manufacturing facility, which is located in a separate building from our EXPAREL manufacturing facility. The assessment report alsorecommended a selective recall of DepoCyt(e) in European Union (EU) member states where DepoCyt(e) is not considered to be an "essential medicinalproduct," which contributed to a reduction in product sales of DepoCyt(e) during fiscal year 2012. Although we received notice from the MHRA in January2013 that our remediation efforts were successful and that we could resume production of DepoCyt(e) for sale in Europe, we may be required in the future tocease manufacturing operations at our facilities in response to inspection reports or other regulatory actions, and such temporary cessations could result inadditional costs or delays in the production and sale of our products. Our San Diego facilities are also subject to the risks of a natural or man-made disaster, including earthquakes and fires, or other business disruption. Inaddition, we have obtained limited property and business interruption insurance coverage for our facilities in San Diego. However, our insurance coverage maynot reimburse us, or may not be sufficient to reimburse us, for any expenses or losses we may suffer. There can be no assurance that we would be able to meetour requirements for EXPAREL and DepoCyt(e) if there were a catastrophic event or failure of our current manufacturing system. If we are required to changeor add a new manufacturer or supplier, the process would likely require prior FDA and/or equivalent foreign regulatory authority approval, and would be verytime consuming. An inability to continue manufacturing adequate supplies of EXPAREL and DepoCyt(e) at our facilities in San Diego, California could resultin a disruption in the supply of EXPAREL and DepoCyt(e), respectively, to our customers and partners and a breach of our contractual obligations to suchcounterparties.We rely on third parties for the timely supply of specified raw materials and equipment for the manufacture of DepoCyt(e) and EXPAREL.Although we actively manage these third-party relationships to provide continuity and quality, some events which are beyond our control couldresult in the complete or partial failure of these goods and services. Any such failure could have a material adverse effect on our financialcondition and operations. We purchase certain raw materials and equipment from various suppliers in order to manufacture our products. The acquisition of certain of thesematerials may require considerable lead times, and our ability to source such materials is also dependent on logistics providers. If we are unable to source therequired raw materials and equipment from our suppliers on a timely basis and in accordance with our specifications, we may experience delays inmanufacturing and may not be able to meet our customers' or partners’ demands for our products. In addition, we and our third-party suppliers must complywith federal, state and foreign regulations, including cGMP regulations, and any failure to comply with applicable regulations, or failure of governmentagencies to provide necessary authorizations, may harm our ability to manufacture and commercialize our products on a timely and competitive basis, whichcould result in decreased product sales and lower revenues.Our future growth depends on our ability to identify, develop, acquire or in-license products and if we do not successfully identify, develop,acquire or in-license related product candidates or integrate them into our operations, we may have limited growth opportunities. An important part of our business strategy is to continue to develop a pipeline of product candidates by developing, acquiring or in-licensing products,businesses or technologies that we believe are a strategic fit with our focus on the hospital marketplace. However, these business activities may entail numerousoperational and financial risks, including:•significant capital expenditures;•difficulty or inability to secure financing to fund development activities for such development, acquisition or in-licensed products ortechnologies; •incurrence of substantial debt or dilutive issuances of securities to pay for development, acquisition or in-licensing of new products; •disruption of our business and diversion of our management's time and attention;•higher than expected development, acquisition or in-license and integration costs; •exposure to unknown liabilities; •difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel; •inability to retain key employees of any acquired businesses; •difficulty entering markets in which we have limited or no direct experience;•difficulty in managing multiple product development programs; and •inability to successfully develop new products or clinical failure. We have limited resources to identify and execute the development, acquisition or in-licensing of products, businesses and technologies and integrate theminto our current infrastructure. We may compete with larger pharmaceutical companies and27Table of Contentsother competitors, including public and private research organizations, academic institutions and government agencies, in our efforts to establish newcollaborations and in-licensing opportunities. These competitors likely will have access to greater financial resources, research and development staffs andfacilities than us and may have greater expertise in identifying and evaluating new opportunities. We may not be successful in locating and acquiring or in-licensing additional desirable product candidates on acceptable terms or at all. Moreover, we may devote resources to potential development, acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts.Our business involves the use of hazardous materials and we must comply with environmental laws and regulations, which can be expensive andrestrict how we do business. Our manufacturing activities involve the controlled storage, use and disposal of hazardous materials, including the components of our products, productcandidates and other hazardous compounds. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling,release and disposal of, and exposure to, these hazardous materials. Violation of these laws and regulations could lead to substantial fines and penalties.Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by these laws andregulations, we cannot eliminate the risk of accidental contamination or injury from these materials or unintended failure to comply with these laws andregulations. In the event of an accident or failure to comply with these laws and regulations, state or federal authorities may curtail our use of these materialsand interrupt our business operations. In addition, we could become subject to potentially material liabilities relating to the investigation and cleanup of anycontamination, whether currently unknown or caused by future releases.Our business and operations would suffer in the event of system failures. Despite the implementation of security measures, our internal computer systems are vulnerable to damage from computer viruses, human error,unauthorized access, natural disasters, intentional acts of vandalism, terrorism, war and telecommunication and electrical failures. Any system failure,accident or security breach that causes interruptions in our operations could result in a material disruption of our product development programs. For example,the loss of clinical trial data from completed clinical trials for EXPAREL could result in delays in our regulatory approval efforts and significantly increaseour costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss or damage to our data or applications, orinappropriate disclosure of confidential or proprietary information, we may incur liability and the further development of our product candidates may bedelayed.Any collaboration arrangements that we may enter into in the future may not be successful, which could adversely affect our ability to develop andcommercialize our product candidates. Our business model is to commercialize our product candidates in the United States and generally to seek collaboration arrangements withpharmaceutical or biotechnology companies for the development or commercialization of our product candidates in the rest of the world. Accordingly, we mayenter into collaboration arrangements in the future on a selective basis. Any future collaboration arrangements that we enter into may not be successful. Thesuccess of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significantdiscretion in determining the efforts and resources that they will apply to these collaboration arrangements. Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in thedevelopment process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. Thesedisagreements can be difficult to resolve if neither of the parties has final decision making authority. Collaborations with pharmaceutical companies and other third parties often are terminated or allowed to expire by the other party. Any such termination orexpiration would adversely affect us financially and could harm our business reputation.Clinical trials may fail to demonstrate the safety and efficacy of our drug products, which could prevent or significantly delay obtaining regulatoryapproval.Prior to receiving approval to commercialize any of our drug products, we must demonstrate with substantial evidence from well-controlled clinicaltrials, and to the satisfaction of the FDA, and other regulatory authorities in the U.S. and other countries, that each of the products is both safe and effective.For each drug product, we will need to demonstrate its efficacy and monitor its safety throughout the process. If such development is unsuccessful, ourbusiness and reputation would be harmed and our stock price would be adversely affected.All of our drug products are prone to the risks of failure inherent in drug development. Clinical trials of new drug products sufficient to obtainregulatory marketing approval are expensive and take years to complete. We may not be able to successfully complete clinical testing within the time frame wehave planned, or at all. We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent us fromreceiving regulatory approval or commercializing our drug products. In addition, the results of pre-clinical studies and early-stage clinical trials of28Table of Contentsour drug products do not necessarily predict the results of later-stage clinical trials. Later-stage clinical trials may fail to demonstrate that a drug product is safeand effective despite having progressed through initial clinical testing. Even if we believe the data collected from clinical trials of our drug products ispromising, such data may not be sufficient to support approval by the FDA or any other U.S. or foreign regulatory approval. Pre-clinical and clinical data canbe interpreted in different ways. Accordingly, FDA officials could interpret such data in different ways than we or our partners do which could delay, limit or prevent regulatoryapproval. The FDA, other regulatory authorities, our institutional review boards, our contract research organizations, or we ourselves may suspend orterminate our clinical trials for our drug products. Any failure or significant delay in completing clinical trials for our drug products, or in receiving regulatoryapproval for the sale of any drugs resulting from our drug products, may severely harm our business and reputation. Even if we receive FDA and otherregulatory approvals, our drug products may later exhibit adverse effects that may limit or prevent their widespread use, may cause the FDA to revoke,suspend or limit their approval, or may force us to withdraw products derived from those drug products from the market.Our dependence on contract research organizations could result in delays in and additional costs for our drug development efforts.We may rely on contract research organizations, or CROs, to perform preclinical testing and clinical trials for drug candidates that we choose to developwithout a collaborator. If the CROs that we hire to perform our preclinical testing and clinical trials or our collaborators or licensees do not meet deadlines, donot follow proper procedures, or a conflict arises between us and our CROs, our preclinical testing and clinical trials may take longer than expected, may bedelayed or may be terminated. If we were forced to find a replacement CRO to perform any of our preclinical testing or clinical trials, we may not be able tofind a suitable replacement on favorable terms, if at all. Even if we were able to find another CRO to perform a preclinical test or clinical trial, any materialdelay in a test or clinical trial may result in significant additional expenditures that could adversely affect our operating results. Events such as these may alsodelay regulatory approval for our drug candidates or our ability to commercialize our products.We depend on clinical investigators and clinical sites to enroll patients in our clinical trials and sometimes other third parties to manage the trialsand to perform related data collection and analysis, and, as a result, we may face costs and delays outside of our control. We rely on clinical investigators and clinical sites to enroll patients and sometimes third parties to manage our trials and to perform related datacollection and analysis. However, we may be unable to control the amount and timing of resources that the clinical sites that conduct the clinical testing maydevote to our clinical trials. If our clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials or fail to enroll themon our planned schedule, we will be unable to complete these trials or to complete them as planned, which could delay or prevent us from obtaining regulatoryapprovals for our product candidates. Our agreements with clinical investigators and clinical sites for clinical testing and for trial management services place substantial responsibilities onthese parties, which could result in delays in, or termination of, our clinical trials if these parties fail to perform as expected. For example, if any of our clinicaltrial sites fail to comply with FDA-approved good clinical practices, we may be unable to use the data gathered at those sites. If these clinical investigators,clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of theclinical data they obtain is compromised due to their failure to adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayedor terminated, and we may be unable to obtain regulatory approval for, or successfully commercialize, our product candidates.Regulatory RisksWe may not receive regulatory approval for any of our product candidates, or the approval may be delayed for various reasons, includingsuccessful challenges to the FDA's interpretation of Section 505(b)(2), which would have a material adverse effect on our business and financialcondition. We may experience delays in our efforts to obtain regulatory approval from the FDA for any of our product candidates, and there can be no assurancethat such approval will not be delayed, or that the FDA will ultimately approve these product candidates. Although the FDA's longstanding position has beenthat the Agency may rely upon prior findings of safety or effectiveness to support approval of a 505(b)(2) application, this policy has been controversial andsubject to challenge in the past. If the FDA's policy is successfully challenged administratively or in court, we may be required to seek approval of ourproducts via full NDAs that contain a complete data package demonstrating the safety and effectiveness of our products, which would be time-consuming andexpensive and would have a material adverse effect on our business and financial condition.29Table of Contents The FDA, as a condition of the EXPAREL approval on October 28, 2011, has required us to study EXPAREL in pediatric patients. We have agreed to atrial timeline where, over several years, we will study pediatric patient populations in descending order starting with 12-18 year olds and ending with childrenunder two years of age. These trials will be expensive and time consuming and we will be required to meet the timelines for submission of protocols and dataand for completion as agreed with the FDA, and we may be delayed in meeting such timelines. We may be required to conduct these trials even if we believethat the costs and potential benefits of conducting the trials are not warranted from a scientific or financial perspective. The failure to conduct these pediatrictrials or to meet applicable deadlines could result in the imposition of sanctions, including, among other things, issuance of warnings letters or imposition ofseizures or injunctions.The FDA may determine that EXPAREL or any of our product candidates have undesirable side effects. If concerns are raised regarding the safety of a new drug as a result of undesirable side effects identified during clinical testing, the FDA may decline toapprove the drug at the end of the NDA review period or issue a letter requesting additional data or information prior to making a final decision regardingwhether or not to approve the drug. The number of such requests for additional data or information issued by the FDA in recent years has increased, andresulted in substantial delays in the approval of several new drugs. Undesirable side effects caused by EXPAREL or any product candidate could also resultin the inclusion of unfavorable information in our product labeling, imposition of distribution or use restrictions, a requirement to conduct post-market studiesor to implement a risk evaluation and mitigation strategy, denial, suspension or withdrawal of regulatory approval by the FDA or other regulatory authoritiesfor any or all targeted indications, and in turn prevent us from commercializing and generating revenues from the sale of EXPAREL or any product candidate. For example, the side effects observed in the EXPAREL clinical trials completed to date include nausea and vomiting. In addition, the class of drugs thatEXPAREL belongs to has been associated with nervous system and cardiovascular toxicities at high doses. We cannot be certain that these side effects andothers will not be observed in the future, or that the FDA will not require additional trials or impose more severe labeling restrictions due to these side effects orother concerns. The active component of EXPAREL is bupivacaine and bupivacaine infusions have been associated with the destruction of articular cartilage,or chondrolysis. Chondrolysis has not been observed in clinical trials of EXPAREL, but we cannot be certain that this side effect will not be observed in thefuture. Following approval of EXPAREL or any of our product candidates, if we or others later identify previously unknown undesirable side effects caused bysuch products, if known side effects are more frequent or severe than in the past, or if we or others detect unexpected safety signals for such products or anyproducts perceived to be similar to such products:•regulatory authorities may require the addition of unfavorable labeling statements, specific warnings or contraindications (including boxedwarnings); •regulatory authorities may suspend or withdraw their approval of the product, or require it to be removed from the market; •regulatory authorities may impose restrictions on the distribution or use of the product; •we may be required to change the way the product is administered, conduct additional clinical trials, reformulate the product, change thelabeling of the product or change or obtain re-approvals of manufacturing facilities; •sales of the product may be significantly decreased from projected sales;•we may be subject to government investigations, product liability claims and litigation; and •our reputation may suffer. Any of these events could prevent us from achieving or maintaining market acceptance of EXPAREL or any of our product candidates and couldsubstantially increase our commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from its sale.Regulatory approval for any approved product is limited by the FDA to those specific indications and conditions for which clinical safety andefficacy have been demonstrated. Any regulatory approval is limited to those specific diseases and indications for which a product is deemed to be safe and effective by the FDA. Forexample, the FDA-approved label for EXPAREL does not include an indication in obstetrical paracervical block anesthesia. In addition to the FDA approvalrequired for new formulations, any new indication for an approved product also requires FDA approval. If we are not able to obtain FDA approval for anydesired future indications for our products and product candidates, our ability to effectively market and sell our products may be reduced and our businessmay be adversely affected. While physicians may choose to prescribe drugs for uses that are not described in the product's labeling and for uses that differ from those tested inclinical studies and approved by the regulatory authorities, our ability to promote the products is limited to those indications that are specifically approved bythe FDA. These "off-label" uses are common across medical specialties and may constitute an appropriate treatment for some patients in varied circumstances.Regulatory authorities in the United States generally do not regulate the behavior of physicians in their choice of treatments. Regulatory authorities do, however,restrict communications by pharmaceutical companies on the subject of off-label use. Although recent court decisions30Table of Contentssuggest that certain off-label promotional activities may be protected under the First Amendment, the scope of any such protection is unclear. If our promotionalactivities fail to comply with the FDA's regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition,our failure to follow FDA rules and guidelines relating to promotion and advertising may cause the FDA to issue warning letters or untitled letters, suspend orwithdraw an approved product from the market, require a recall or institute fines or civil fines, or could result in disgorgement of money, operatingrestrictions, injunctions or criminal prosecution, any of which could harm our business.If we fail to comply with federal and state healthcare laws, including fraud and abuse and health information privacy and security laws, we couldface substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected. As a pharmaceutical company, even though we do not provide healthcare services or receive payments directly from or bill directly to Medicare, Medicaidor other third-party payers for our products, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients' rights are andwill be applicable to our business. We would be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and thestates in which we conduct our business. The laws that may affect our ability to operate include:•the federal Anti-Kickback Statute, which constrains our marketing practices, educational programs, pricing policies and relationships withhealthcare providers or other entities, by prohibiting, among other things, soliciting, receiving, offering or paying remuneration, directly orindirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under federally funded healthcareprograms, such as the Medicare and Medicaid programs;•federal civil and criminal false claims and false statement laws and civil monetary penalty laws, which prohibit, among other things,individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-partypayers that are false or fraudulent or making any materially false statement in connection with the delivery or payment for healthcare benefits,items, or services; •the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended, which created federal criminal and civilstatutes that prohibit executing a scheme to defraud any healthcare benefit program; •federal physician self-referral laws, such as the Stark law, which prohibit a physician from making a referral to a provider of certain healthservices with which the physician or the physician's family member has a financial interest, and prohibit submission of a claim forreimbursement pursuant to a prohibited referral; •HIPAA, as amended by the Health Information Technology and Clinical Health Act, or HITECH, and its implementing regulations, whichimposes certain requirements relating to the privacy, security and transmission of individually identifiable health information; and •state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or servicesreimbursed by any third-party payer, including commercial insurers, and state laws governing the privacy and security of health information incertain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicatingcompliance efforts. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under the U.S. federal Anti-KickbackStatute, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Moreover, recent health care reformlegislation has strengthened these laws. For example, the Health Care Reform Law, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes; a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. Inaddition, the Health Care Reform Law provides that the government may assert that a claim including items or services resulting from a violation of the federalanti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Federal false claims laws prohibit any person fromknowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a falsestatement to get a false claim paid. Recently, several pharmaceutical and other healthcare companies have been prosecuted under the federal false claims lawsfor allegedly inflating drug prices they report to pricing services, which in turn are used by the government to set Medicare and Medicaid reimbursement rates,and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certainmarketing practices, including off-label promotion, may also violate false claims laws. To the extent that any product we make is sold in a foreign country, wemay be subject to similar foreign laws and regulations. Further, there has been a recent trend in the increase of federal and state laws and regulations regarding consulting arrangements with physicians. TheHealth Care Reform Law imposes new requirements to report certain financial arrangements with physicians and others, including reporting any "transfer ofvalue" made or distributed to prescribers and other healthcare providers and reporting any investment interests held by physicians and their immediate familymembers during each calendar year beginning in 2013, subject to federal implementation and enforcement policies. In addition, some states such as California,Massachusetts and Vermont, mandate that we comply with a state code of conduct, adopt a company code of conduct under state criteria, disclose marketingpayments made to physicians, and/or report compliance information to31Table of Contentsthe state authorities. Some states, such as Massachusetts, have created an internet database to provide disclosed information on certain transactions withphysicians to the public. The shifting compliance environment and the need to build and maintain robust and expandable systems to comply in multiplejurisdictions with different compliance and reporting requirements increases the possibility that a pharmaceutical company may run afoul of one or more ofthe requirements. If our past or present operations, or those of our distributors are found to be in violation of any of the laws described above or any other governmentalregulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in U.S.federal or state health care programs, and the curtailment or restructuring of our operations. Similarly, if the healthcare providers, distributors or other entitieswith whom we do business are found to be out of compliance with applicable laws and regulations, they may be subject to sanctions, which could also have anegative impact on us. The risk of being found to have violated such laws is increased by the fact that many of them have not been fully interpreted by theregulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any penalties, damages, fines, curtailment or restructuring ofour operations could materially adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate therisk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws,even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's attention from the operation of ourbusiness. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.The design, development, manufacture, supply, and distribution of EXPAREL and DepoCyt(e) is highly regulated and technically complex. The design, development, manufacture, supply, and distribution of EXPAREL and DepoCyt(e) is highly regulated and technically complex. We, alongwith our third-party providers, must comply with all applicable regulatory requirements of the FDA and foreign authorities. In addition, the facilities used tomanufacture, store, and distribute our products are subject to inspection by regulatory authorities at any time to determine compliance with applicableregulations. The manufacturing techniques and facilities used for the manufacture and supply of our products must be operated in conformity with cGMP and otherFDA, DEA and MHRA regulations, including potentially prior regulatory approval. In addition, any expansion of our existing manufacturing facilities or theintroduction of any new manufacturing facilities would also require conformity with cGMP and other FDA, DEA and MHRA regulations. In complying withthese requirements, we, along with our suppliers, must continually expend time, money and effort in production, record keeping, and quality assurance andcontrol to ensure that our products meet applicable specifications and other requirements for safety, efficacy and quality. In addition, we, along with oursuppliers, are subject to unannounced inspections by the FDA, MHRA and other regulatory authorities. Any failure to comply with regulatory and other legal requirements applicable to the manufacture, supply and distribution of our products could lead toremedial action (such as recalls), civil and criminal penalties and delays in manufacture, supply and distribution of our products. For instance, in July 2012,the MHRA issued its inspection report in which the MHRA noted certain critical and major failures to comply with the Principles and Guidelines of GoodManufacturing Practices related to our DepoCyt(e) manufacturing facility. We responded to the MHRA regarding these inspectional observations, completedimplementation of our proposed remediation plan and were reinspected by the MHRA in December 2012. In January 2013, we received notice from the MHRAthat our remediation efforts were successful and that we could recommence manufacturing DepoCyt(e) for Europe.If we fail to comply with the extensive regulatory requirements to which we and our products, EXPAREL and DepoCyt(e), are subject, suchproducts could be subject to restrictions or withdrawal from the market and we could be subject to penalties. The testing, manufacturing, quality control, labeling, safety, effectiveness, advertising, promotion, storage, sales, distribution, import, export andmarketing, among other things, of our products EXPAREL and DepoCyt(e) are subject to extensive regulation by governmental authorities in the United Statesand elsewhere throughout the world. Quality control and manufacturing procedures regarding EXPAREL and DepoCyt(e) must conform to cGMP. Regulatoryauthorities, including the FDA and the MHRA, periodically inspect manufacturing facilities to assess compliance with cGMP. Our failure, or the failure ofany contract manufacturers with whom we may work in the future, to comply with the laws administered by the FDA, the MHRA or other governmentalauthorities could result in, among other things, any of the following:•product recall or seizure; •suspension or withdrawal of an approved product from the market; •interruption of production; •operating restrictions; •warning letters; •injunctions; 32Table of Contents•refusal to permit import or export of an approved product;•refusal to approve pending applications or supplements to approved applications that we submit;•denial of permission to file an application or supplement in a jurisdiction;•consent decrees;•suspension or termination of ongoing clinical trials;•fines and other monetary penalties; •criminal prosecutions; and •unanticipated expenditures.If the government or third-party payers fail to provide coverage and adequate coverage and payment rates for EXPAREL, DepoCyt(e) or anyfuture products we may develop, license or acquire, if any, are unavailable, or if hospitals choose to use therapies that are less expensive, ourrevenue and prospects for profitability will be limited. In both domestic and foreign markets, sales of our existing products and any future products will depend in part upon the availability of coverage andreimbursement from third-party payers. Such third-party payers include government health programs such as Medicare and Medicaid, managed careproviders, private health insurers and other organizations. Coverage decisions may depend upon clinical and economic standards that disfavor new drugproducts when more established or lower cost therapeutic alternatives are already available or subsequently become available. Assuming coverage is approved,the resulting reimbursement payment rates might not be adequate. In particular, many U.S. hospitals receive a fixed reimbursement amount per procedure forcertain surgeries and other treatment therapies they perform. Because this amount may not be based on the actual expenses the hospital incurs, hospitals maychoose to use therapies which are less expensive when compared to our product candidates. Although hospitals currently receive separate reimbursement forEXPAREL used in the hospital outpatient setting, EXPAREL, DepoCyt(e) or any product candidates that we may develop, in-license or acquire, if approved,will face competition from other therapies and drugs for these limited hospital financial resources. We may need to conduct post-marketing studies in order todemonstrate the cost-effectiveness of any future products to the satisfaction of hospitals, other target customers and their third-party payers. Such studiesmight require us to commit a significant amount of management time and financial and other resources. Our future products might not ultimately beconsidered cost-effective. Adequate third-party coverage and reimbursement might not be available to enable us to maintain price levels sufficient to realize anappropriate return on investment in product development. Third-party payers, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controllinghealthcare costs. For example, third-party payers may limit the indications for which our products will be reimbursed to a smaller set of indications than webelieve is appropriate or limit the circumstances under which our products will be reimbursed to a smaller set of circumstances than we believe is appropriate.In addition, in the United States, no uniform policy of coverage and reimbursement for drug products exists among third-party payers. Therefore, coverageand reimbursement for drug products can differ significantly from payer to payer. Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and in internationalmarkets, as federal, state, and foreign governments continue to propose and pass new legislation designed to reduce or contain the cost of healthcare. Third-party coverage and reimbursement for our products or product candidates for which we receive regulatory approval may not be available or adequate in eitherthe United States or international markets, which could have a negative effect on our business, results of operations, financial condition and prospects.We are subject to new legislation, regulatory proposals and healthcare payer initiatives that may increase our costs of compliance and adverselyaffect our ability to market our products, obtain collaborators and raise capital. In March 2010, the President signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education AffordabilityReconciliation Act, which we refer to collectively as the Health Care Reform Law. The Health Care Reform Law makes extensive changes to the delivery ofhealth care in the United States. Among the provisions of the Health Care Reform Law of greatest importance to the pharmaceutical industry are the following:•an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportionedamong these entities according to their market share in certain government healthcare programs, beginning in 2011; •an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program, retroactive to January 1,2010, to 23.1% and 13.0% of the average manufacturer price for most branded and generic drugs, respectively; •a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50.0% point-of-sale discounts off negotiatedprices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer's outpatient drugsto be covered under Medicare Part D, beginning in 2011; 33Table of Contents•extension of manufacturers' Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed careorganizations, effective March 23, 2010; •expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additionalindividuals beginning in April 2010 and by adding new mandatory eligibility categories for certain individuals with income at or below 133.0%of the Federal Poverty Level beginning in 2014, thereby potentially increasing both the volume of sales and manufacturers' Medicaid rebateliability; •expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program, effective in January 2010; •a new requirement to annually report drug samples that manufacturers and distributors provide to physicians, effective April 1, 2012, subjectto federal implementation and enforcement policies; •a licensure framework for follow-on biologic products;•a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research,along with funding for such research; •creation of the Independent Payment Advisory Board which, beginning in 2014, will have authority to recommend certain changes to theMedicare program that could result in reduced payments for prescription drugs and those recommendations could have the effect of law even ifCongress does not act on the recommendations; and •establishment of a Center for Medicare Innovation at the Centers for Medicare & Medicaid Services to test innovative payment and servicedelivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending, beginning by January 1, 2011. These measures could result in decreased net revenues from our pharmaceutical products and decrease potential returns from our development efforts.Congress has also proposed a number of legislative initiatives, including possible repeal of the Health Care Reform Law. At this time, it remains unclearwhether there will be any changes made to the Health Care Reform Law, whether to certain provisions or its entirety. In addition, some details regarding theimplementation of the Health Care Reform Law are yet to be determined, and at this time, the full effect that the Health Care Reform Law would have on ourbusiness remains unclear. In addition, other legislative changes have been proposed and adopted since the Health Care Reform Law was enacted. For example, on August 2, 2011,the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction torecommend proposals in spending reductions to Congress. As a result of the failure of the Joint Select Committee to propose, and of Congress to enact, deficitreduction measures of at least $1.2 trillion for the years 2013 through 2021, the Budget Control Act provides for automatic cuts to be made to most federalgovernment programs, which, with respect to Medicare, would include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year,starting in 2013. Pursuant to the American Taxpayer Relief Act of 2012, which was enacted by Congress on January 1, 2013, the imposition of theseautomatic cuts was delayed until March 1, 2013. On March 1, 2013, the President signed an executive order implementing the automatic budget reductions.Pursuant to that order, payments to Medicare providers for services furnished on or after April 1, 2013 were reduced by 2%. In addition, the new law, amongother things, reduces Medicare inpatient payment amounts to hospitals and increases the statute of limitations for recovering overpayments from three years tofive years. The full impact on our business of this new law, assuming it is implemented, is uncertain. Nor is it clear whether other legislative changes will beadopted or how such changes would affect the demand for our products. In addition, there have been a number of other legislative and regulatory proposals aimed at changing the pharmaceutical industry. In particular,California has enacted legislation that requires development of an electronic pedigree to track and trace each prescription drug at the saleable unit level throughthe distribution system. California's electronic pedigree requirement is scheduled to take effect in January 2015. Compliance with California and future federalor state electronic pedigree requirements may increase our operational expenses and impose significant administrative burdens. As a result of these and othernew proposals, we may determine to change our current manner of operation, provide additional benefits or change our contract arrangements, any of whichcould have a material adverse effect on our business, financial condition and results of operations. In July 2012, the President signed into law the Food and Drug Administration Safety and Innovation Act, or FDASIA. This law makes severalsignificant changes to the Federal Food, Drug, and Cosmetic Act and FDA's processes for reviewing marketing applications that could have a significantimpact on the pharmaceutical industry, including, among other things, the following:•reauthorizes the Prescription Drug User Fee Act, or PDUFA, increases the amount of associated user fees, and, for certain types of applications,increases the expected time frame for FDA review of the application;•permanently reauthorizes and makes some revisions to the Best Pharmaceuticals for Children Act and the Pediatric Research Equity Act, whichprovides for pediatric exclusivity and mandated pediatric assessments for certain types of applications, respectively; 34Table of Contents•revises certain standards and requirements for FDA inspections of manufacturing facilities and the importation of drug products from foreigncountries; •creates incentives for the development of certain antibiotic drug products; •modifies the standards for accelerated approval of certain new medical treatments; •expands the reporting requirements for potential and actual drug shortages; •requires the FDA to issue a report on, among other things, ensuring safe use of prescription drugs that have the potential for abuse; •requires the FDA to hold a public meeting regarding the potential rescheduling of drug products containing hydrocodone, which was held inJanuary 2013; and •requires electronic submission of certain marketing applications following the issuance of final FDA regulations. The full impact of FDASIA on our business is uncertain.Public concern regarding the safety of drug products such as EXPAREL could result in the inclusion of unfavorable information in our labeling,or require us to undertake other activities that may entail additional costs. In light of widely publicized events concerning the safety risk of certain drug products, the FDA, members of Congress, the Government AccountabilityOffice, medical professionals and the general public have raised concerns about potential drug safety issues. These events have resulted in the withdrawal ofdrug products, revisions to drug labeling that further limit use of the drug products and the establishment of risk management programs that may, forexample, restrict distribution of drug products after approval. The Food and Drug Administration Amendments Act of 2007, or FDAAA, grants significantexpanded authority to the FDA, much of which is aimed at improving the safety of drug products before and after approval. In particular, the FDAAAauthorizes the FDA to, among other things, require post-approval studies and clinical trials, mandate changes to drug labeling to reflect new safety informationand require risk evaluation and mitigation strategies for certain drugs, including certain currently approved drugs. The FDAAA also significantly expands thefederal government's clinical trial registry and results databank, which we expect will result in significantly increased government oversight of clinical trials.Under the FDAAA, companies that violate these and other provisions of the new law are subject to substantial civil monetary penalties, among otherregulatory, civil and criminal penalties. The increased attention to drug safety issues may result in a more cautious approach by the FDA in its review of datafrom our clinical trials. Data from clinical trials may receive greater scrutiny, particularly with respect to safety, which may make the FDA or other regulatoryauthorities more likely to require additional preclinical studies or clinical trials. If the FDA requires us to provide additional clinical or preclinical data forEXPAREL, the indications for which this product candidate was approved may be limited or there may be specific warnings or limitations on dosing, and ourefforts to commercialize EXPAREL may be otherwise adversely impacted.Risks Related to Intellectual PropertyThe patents and the patent applications that we have covering our products are limited to specific injectable formulations, processes and uses ofdrugs encapsulated in our DepoFoam drug delivery technology and our market opportunity for our product candidates may be limited by the lackof patent protection for the active ingredient itself and other formulations and delivery technology and systems that may be developed bycompetitors. The active ingredients in EXPAREL and DepoCyt(e) are bupivacaine and cytarabine, respectively. Patent protection for the bupivacaine and cytarabinemolecules themselves has expired and generic immediate-release products are available. As a result, competitors who obtain the requisite regulatory approvalcan offer products with the same active ingredients as EXPAREL and DepoCyt(e) so long as the competitors do not infringe any process, use or formulationpatents that we have developed for these drugs encapsulated in our DepoFoam drug delivery technology. For example, we are aware of at least one long-acting injectable bupivacaine product in development which utilizes an alternative delivery system toEXPAREL. Such a product is similar to EXPAREL in that it also extends the duration of effect of bupivacaine, but achieves this clinical outcome using acompletely different drug delivery system as compared to our DepoFoam drug delivery technology. The number of patents and patent applications covering products in the same field as EXPAREL indicates that competitors have sought to develop andmay seek to market competing formulations that may not be covered by our patents and patent applications. The commercial opportunity for EXPAREL couldbe significantly harmed if competitors are able to develop and commercialize alternative formulations of bupivacaine that are long acting but outside the scopeof our patents. Because EXPAREL has been approved by the FDA, one or more third parties may challenge the patents covering this product, which could result in theinvalidation or unenforceability of some or all of the relevant patent claims. For example, if a third party files an Abbreviated New Drug Application, orANDA, for a generic drug product containing bupivacaine and relies in whole or in part on studies conducted by or for us, the third party will be required tocertify to the FDA that either: (1) there is no patent information listed in the FDA's Orange Book with respect to our NDA for EXPAREL; (2) the patents listedin the Orange Book have expired; (3) the listed patents have not expired, but will expire on a particular date and approval is sought after patent expiration; or(4) the listed patents are invalid or will not be infringed by the manufacture, use or sale of the third-35Table of Contentsparty's generic drug product. A certification that the new product will not infringe the Orange Book-listed patents for EXPAREL, or that such patents areinvalid, is called a paragraph IV certification. If the third party submits a paragraph IV certification to the FDA, a notice of the paragraph IV certification mustalso be sent to us once the third-party's ANDA is accepted for filing by the FDA. We may then initiate a lawsuit to defend the patents identified in the notice.The filing of a patent infringement lawsuit within 45 days of receipt of the notice automatically prevents the FDA from approving the third-party's ANDAuntil the earliest of 30 months or the date on which the patent expires, the lawsuit is settled, or the court reaches a decision in the infringement lawsuit in favorof the third party. If we do not file a patent infringement lawsuit within the required 45-day period, the third-party's ANDA will not be subject to the 30-monthstay. Litigation or other proceedings to enforce or defend intellectual property rights are often very complex in nature, may be very expensive and time-consuming, may divert our management's attention from our core business, and may result in unfavorable results that could adversely impact our ability toprevent third parties from competing with our products.Because it is difficult and costly to protect our proprietary rights, we may not be able to ensure their protection and all patents will eventuallyexpire. Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection for EXPAREL, DepoCyt(e),DepoFoam and for any product candidates that we may develop, license or acquire and the methods we use to manufacture them, as well as successfullydefending these patents and trade secrets against third-party challenges. We will only be able to protect our technologies from unauthorized use by third partiesto the extent that valid and enforceable patents or trade secrets cover them. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for whichimportant legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical or biotechnology patents hasemerged to date in the United States. Patent positions and policies outside the United States are even more uncertain. Changes in either the patent laws or ininterpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict thebreadth of claims that may be allowed or enforced in our patents or in third-party patents. The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protectour rights or permit us to gain or keep our competitive advantage. For example:•we may not have been the first to make the inventions covered by each of our pending patent applications and issued patents; •we may not have been the first to file patent applications for these inventions; •others may independently develop similar or alternative technologies or duplicate any of our product candidates or technologies; •it is possible that none of the pending patent applications will result in issued patents; •the issued patents covering our product candidates may not provide a basis for commercially viable active products, may not provide us withany competitive advantages, may not have sufficient scope or strength to protect the technologies they were intended to protect or may bechallenged by third parties; •others may design around our patent claims to produce competitive products that fall outside the scope of our patents;•we may not develop or in-license additional proprietary technologies that are patentable; •patents of others may have an adverse effect on our business; or •competitors may infringe our patents and we may not have adequate resources to enforce our patents. Patent applications in the United States are maintained in confidence for at least 18 months after their earliest effective filing date. Consequently, wecannot be certain we were the first to invent or the first to file patent applications on EXPAREL, our DepoFoam drug delivery technology or any productcandidates that we may develop, license or acquire. In the event that a third party has also filed a U.S. patent application relating to our product candidates ora similar invention, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of inventionin the United States. The costs of these proceedings could be substantial and it is possible that our efforts would be unsuccessful, resulting in a materialadverse effect on our U.S. patent position. Furthermore, we may not have identified all United States and foreign patents or published applications that affectour business either by blocking our ability to commercialize our drugs or by covering similar technologies that affect our drug market. In addition, some countries, including many in Europe, do not grant patent claims directed to methods of treating humans, and in these countries patentprotection may not be available at all to protect our product candidates. Even if patents issue, we cannot guarantee that the claims of those patents will be validand enforceable or provide us with any significant protection against competitive products, or otherwise be commercially valuable to us. Furthermore, while wegenerally apply for patents in those countries where we intend to make, have made, use, or sell patented products, we may not accurately predict all of thecountries where patent protection will ultimately be desirable. If we fail to timely file a patent application in any such country,36Table of Contentswe may be precluded from doing so at a later date. We also cannot assure you that the patents issuing as a result of our foreign patent applications will have thesame scope of coverage as our United States patents. Some of our older patents have already expired. In the case of DepoCyt(e), key patents providing protection in Europe have expired. In the case ofEXPAREL our European patent application has been granted and provides protection through November 2018. In the United States, our application ispending, and if granted, would provide protection for EXPAREL in the United States through November 2018, an existing formulation patent for EXPARELwill expire in November 2013. Once our patents covering EXPAREL have expired, we will be more reliant on trade secrets to protect against genericcompetition. We also rely on trade secrets to protect our technology, particularly where we do not believe patent protection is appropriate or obtainable. However, tradesecrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, through confidentiality and non-disclosure agreements, ourlicensors, employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information tocompetitors. Policing unauthorized use of our trade secrets or enforcing a claim that a third party illegally obtained and is using our trade secrets is expensiveand time consuming, and the outcome is unpredictable. In addition, trade secret laws in other countries may not be as protective as they are in the UnitedStates. Thus, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently developequivalent knowledge, methods and know-how.In order to protect the goodwill associated with our company and product names, we rely on trademark protection for our marks. We have registered the“Pacira”, “EXPAREL”, “DepoCyt” and “DepoCyte” marks with the U.S. Patent and Trademark Office. A third party may assert a claim that one of ourmarks is confusingly similar to its mark, and such claims or the failure to timely register a mark or objections by the FDA could force us to select a newname for one of our product candidates, which could cause us to incur additional expense or delay the commercialization of such product. If we fail to obtain or maintain patent protection or trade secret protection for EXPAREL, DepoCyt(e), DepoFoam or any product candidate that we maydevelop, license or acquire, third parties could use our proprietary information, which could impair our ability to compete in the market and adversely affectour ability to generate revenues and achieve profitability.If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in anylitigation would harm our business. Our ability to develop, manufacture, market and sell EXPAREL, our DepoFoam drug delivery technology or any product candidates that we maydevelop, license or acquire depends upon our ability to avoid infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents andpending patent applications, which are owned by third parties, exist in the general fields of pain management and cancer treatment and cover the use ofnumerous compounds and formulations in our targeted markets. Because of the uncertainty inherent in any patent or other litigation involving proprietaryrights, we and our licensors may not be successful in defending intellectual property claims by third parties, which could have a material adverse effect on ourresults of operations. Regardless of the outcome of any litigation, defending the litigation may be expensive, time-consuming and distracting to management. Inaddition, because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result inissued patents that EXPAREL or DepoCyt(e) may infringe. There could also be existing patents of which we are not aware that EXPAREL or DepoCyt(e) mayinadvertently infringe. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industriesgenerally. If a third party claims that we infringe on their products or technology, we could face a number of issues, including:•infringement and other intellectual property claims which, with or without merit, can be expensive and time consuming to litigate and can divertmanagement's attention from our core business; •substantial damages for past infringement which we may have to pay if a court decides that our product infringes on a competitor's patent; •a court prohibiting us from selling or licensing our product unless the patent holder licenses the patent to us, which it would not be required todo; •if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to our patents; and •redesigning our processes so they do not infringe, which may not be possible or could require substantial funds and time.We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers. As is common in the biotechnology and pharmaceutical industry, we employ individuals who were previously employed at other biotechnology orpharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject toclaims that these employees or we have inadvertently or otherwise used37Table of Contentsor disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we aresuccessful in defending against these claims, litigation could result in substantial costs and be a distraction to management.Risks Related to Our Financial Condition and Capital RequirementsWe have incurred significant losses since our inception and anticipate that we will incur continued losses for the foreseeable future. We are a specialty pharmaceutical company with a limited operating history. We have focused primarily on developing and commercializing EXPAREL.We have incurred losses in each year since our inception in December 2006, including net losses of $63.9 million, $52.3 million and $43.3 million, for theyears ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, we had an accumulated deficit of $296.4 million. These losses,among other things, have had, and will continue to have, an adverse effect on our stockholders' equity and working capital. We incurred significant pre-commercialization expenses as we prepared for the commercial launch of EXPAREL, and we incur significant sales, marketing and manufacturing expenses,as well as continued development expenses related to the commercialization of EXPAREL. As a result, we expect to continue to incur significant losses for theforeseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent ofany future losses or when we will become profitable, if at all.We may never become profitable. Our ability to become profitable depends upon our ability to generate revenue from EXPAREL. Our ability to generate revenue depends on a number offactors, including, but not limited to, our ability to:•manufacture commercial quantities of EXPAREL, at acceptable cost levels; and•continue to develop a commercial organization and the supporting infrastructure required to successfully market and sell EXPAREL. We anticipate incurring significant additional costs associated with the commercialization of EXPAREL. We also do not anticipate that we will achieveprofitability for a period of time after generating material revenues, if ever. If we are unable to generate revenues, we will not become profitable and may beunable to continue operations without continued funding.Under our financing arrangement with Paul Capital, upon the occurrence of certain events, Paul Capital may require us to repurchase the rightto receive royalty payments that we assigned to it, or may foreclose on certain assets that secure our obligations to Paul Capital. Any exercise byPaul Capital of its right to cause us to repurchase the assigned right or any foreclosure by Paul Capital would adversely affect our results ofoperations and our financial condition. On March 23, 2007, we entered into the Amended and Restated Royalty Interests Assignment Agreement with affiliates of Paul Capital, pursuant to whichwe assigned to Paul Capital the right to receive a portion of our royalty payments from DepoCyt(e) and DepoDur. To secure our obligations to Paul Capital, wegranted Paul Capital a security interest in collateral, which includes the royalty payments we are entitled to receive with respect to sales of DepoCyt(e) andDepoDur, as well as to bank accounts to which such payments are deposited. Under our arrangement with Paul Capital, upon the occurrence of certainevents, or the put events, including if we experience a change of control, we or PPI-CA undergo certain bankruptcy events, transfer any or substantially all ofour rights in DepoCyt(e) or DepoDur, transfer all or substantially all of our assets, breach certain of the covenants, representations or warranties under theAmended and Restated Royalty Interests Assignment Agreement, or sales of DepoCyt(e) or DepoDur are suspended due to an injunction or if we elect tosuspend sales of DepoCyt(e) or DepoDur as a result of a lawsuit filed by certain third parties, Paul Capital may (i) require us to repurchase the rights weassigned to it at a cash price equal to (a) 50% of all cumulative payments made by us to Paul Capital under the Amended and Restated Royalty InterestsAssignment Agreement during the preceding 24 months, multiplied by (b) the number of days from the date of Paul Capital's exercise of such option untilDecember 31, 2014, divided by 365. Any exercise by Paul Capital of its right to cause us to repurchase the assigned right or any foreclosure by Paul Capitalwould adversely affect our results of operations and our financial condition.Our short operating history makes it difficult to evaluate our business and prospects. We were incorporated in December 2006 and have been conducting operations with respect to EXPAREL since March 2007. Our operations to dateinclude organizing and staffing our company, conducting product development activities, including clinical trials and manufacturing development activities,for EXPAREL and manufacturing and related activities for DepoCyt(e) and DepoDur. Further, we worked to establish our commercial infrastructure forEXPAREL, which we launched in the second quarter of 2012. Consequently, any predictions about our future performance may not be as accurate as theycould be if we had a history of successfully developing and commercializing pharmaceutical products.We may need additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our productdevelopment programs or commercialization efforts.38Table of Contents Developing and commercializing products for use in the hospital setting, conducting clinical trials, establishing outsourced manufacturing relationshipsand successfully manufacturing and marketing drugs that we may develop is expensive. We may need to raise additional capital to:•continue to fund our operations;•continue our efforts to hire additional personnel and build a commercial infrastructure to commercialize EXPAREL; •qualify and outsource the commercial-scale manufacturing of our products under cGMP; and •in-license and develop additional product candidates. We may not have sufficient financial resources to continue our operations or meet all of our objectives, which could require us to postpone, scale back oreliminate some, or all, of these objectives. Our future funding requirements will depend on many factors, including, but not limited to:•the costs of maintaining a commercial organization to sell, market and distribute EXPAREL; •the success of the commercialization of EXPAREL; •the cost and timing of manufacturing sufficient supplies of EXPAREL to meet customer demand, including the cost of expanding ourmanufacturing facilities to produce EXPAREL; •the rate of progress and costs of our efforts to prepare for the submission of an NDA for any product candidates that we may in-license oracquire in the future, and the potential that we may need to conduct additional clinical trials to support applications for regulatory approval; •the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with our productcandidates, including any such costs we may be required to expend if our licensors are unwilling or unable to do so; •the effect of competing technological and market developments; •the terms and timing of any collaborative, licensing, co-promotion or other arrangements that we may establish; and •the potential that we may be required to file a lawsuit to defend our patent rights or regulatory exclusivities from challenges by companies seekingto market generic versions of extended-release liposome injection of bupivacaine. Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products andtechnologies. Until we can generate a sufficient amount of product revenue, if ever, we expect to finance future cash needs through public or private equity offerings,debt financings, product supply revenue and royalties, corporate collaboration and licensing arrangements, as well as through interest income earned on cashand investment balances. We cannot be certain that additional funding will be available on acceptable terms, or at all. If adequate funds are not available, wemay be required to delay, reduce the scope of, or eliminate, one or more of our development programs or our commercialization efforts.Our quarterly operating results may fluctuate significantly. We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors,including:•our ability to establish and maintain the necessary commercial infrastructure to sell EXPAREL without substantial delays, including engagingadditional sales and marketing personnel and contracting with third parties for warehousing, distribution, cash collection and relatedcommercial activities; •maintaining our existing manufacturing facilities and expanding our manufacturing capacity, including installing specialized processingequipment for the manufacturing of EXPAREL;•our execution of other collaborative, licensing, distribution, manufacturing or similar arrangements and the timing of payments we may make orreceive under these arrangements; •variations in the level of expenses related to our future development programs; •any product liability or intellectual property infringement lawsuit in which we may become involved; •regulatory developments affecting EXPAREL or the product candidates of our competitors; and •the level of underlying hospital demand for EXPAREL and wholesaler buying patterns. If our quarterly or annual operating results fall below the expectations of investors or securities analysts, the price of our common stock could declinesubstantially. Furthermore, any quarterly or annual fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our futureperformance.Raising additional funds by issuing securities may cause dilution to existing stockholders and raising funds through lending and licensingarrangements may restrict our operations or require us to relinquish proprietary rights.39Table of Contents To the extent that we raise additional capital by issuing equity securities, our existing stockholders' ownership will be diluted. If we raise additional fundsthrough licensing arrangements, it may be necessary to relinquish potentially valuable rights to our potential products or proprietary technologies, or grantlicenses on terms that are not favorable to us. Any debt financing we enter into may involve covenants that restrict our operations. These restrictive covenantsmay include limitations on additional borrowing and specific restrictions on the use of our assets as well as prohibitions on our ability to create liens, paydividends, redeem our stock or make investments.Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to devote substantial time to compliance initiatives, andif we are unable to receive an unqualified attestation report on our internal controls from our independent registered public accounting firm, ourstock price could be adversely affected. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish a report by our management on the effectiveness ofour internal control over financial reporting. The internal control report must contain (i) a statement of management's responsibility for establishing andmaintaining adequate internal control over financial reporting, (ii) a statement identifying the framework used by management to conduct the requiredevaluation of the effectiveness of our internal control over financial reporting and (iii) management's assessment of the effectiveness of our internal control overfinancial reporting as of the end of our most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective. To achieve compliance with Section 404 within the prescribed period, we are engaged in a process to document and evaluate our internal control overfinancial reporting, which is both costly and challenging. In this regard, we dedicate internal resources, hire additional employees for our finance and auditfunctions, potentially engage outside consultants and adopted a detailed work plan to (i) assess and document the adequacy of internal control over financialreporting, (ii) continue steps to improve control processes where appropriate, (iii) validate through testing that controls are functioning as documented, and(iv) implement a continuous reporting and improvement process for internal control over financial reporting. In addition, in connection with the attestationprocess by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requestedimprovements and receiving a favorable attestation. If we cannot favorably assess the effectiveness of our internal control over financial reporting, or if ourindependent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, investors could lose confidence inour financial information and our stock price could decline.The use of our net operating loss carryforwards and research tax credits will be limited. We have significant federal and state net operating loss carryforwards and federal and state research and development tax credit carryforwards. Our netoperating loss carryforwards and research and development tax credits may expire and not be used. Our net operating loss carryforwards will begin expiring in2026 for federal purposes and 2015 for state purposes if we have not used them prior to that time, and our federal tax credits will begin expiring in 2028unless previously used. Our state tax credits carry forward indefinitely. Additionally, our ability to use any net operating loss and credit carryforwards tooffset taxable income or tax, respectively, in the future will be limited under Internal Revenue Code Sections 382 and 383 because we experienced a cumulativechange in ownership of more than 50% within a three-year period. Such an ownership change was triggered by the cumulative ownership changes arising as aresult of the completion of our initial public offering and our other financing transactions. Because of the ownership change, we will be limited regarding theamount of net operating loss carryforwards and research tax credits that we can utilize annually in the future to offset taxable income or tax, respectively. Suchan annual limitation will significantly reduce the utilization of the net operating loss carryforwards and research tax credits before they expire. In addition,California and certain states have suspended use of net operating loss carryforwards for certain taxable years, and other states are considering similarmeasures. As a result, we may incur higher state income tax expense in the future. Depending on our future tax position, continued suspension of our ability touse net operating loss carryforwards in states in which we are subject to income tax could have an adverse impact on our results of operations and financialcondition.Our results of operations and liquidity needs could be materially negatively affected by market fluctuations and economic downturns. Our results of operations could be materially negatively affected by economic conditions generally, both in the United States and elsewhere around theworld. Continuing concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a decliningresidential real estate market in the United States have contributed to increased volatility and diminished expectations for the economy and the markets goingforward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated aneconomic recession and fears of a possible depression. Domestic and international equity markets continue to experience heightened volatility and turmoil.These events and the continuing market upheavals may have an adverse effect on us. In the event of a continuing market downturn, our results of operationscould be adversely affected by those factors in many ways, including making it more difficult for us to raise funds if necessary, and our stock price mayfurther decline.40Table of ContentsRisks Related Our Indebtedness and our Common StockOur common stock price may be subject to significant fluctuations and volatility. Our stock price is volatile, and from February 3, 2011, the first day of trading of our common stock, to February 14, 2014, the trading prices of ourstock have ranged from $6.16 to $71.92 per share. Our stock could be subject to wide fluctuations in price in response to various factors, including the following:•the commercial success of EXPAREL; •results of clinical trials of our product candidates or those of our competitors; •changes or developments in laws or regulations applicable to our product candidates; •introduction of competitive products or technologies; •failure to meet or exceed financial projections we provide to the public; •actual or anticipated variations in quarterly operating results; •failure to meet or exceed the estimates and projections of the investment community; •the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community; •general economic and market conditions and overall fluctuations in U.S. equity markets; •developments concerning our sources of manufacturing supply; •disputes or other developments relating to patents or other proprietary rights; •additions or departures of key scientific or management personnel; •issuances of debt, equity or convertible securities; •changes in the market valuations of similar companies; and •the other factors described in this "Risk Factors" section. In addition, the stock market in general, and the market for small pharmaceutical and biotechnology companies in particular, have experienced extremeprice and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industryfactors may negatively affect the market price of our common stock, regardless of our actual operating performance. Fluctuations in our stock price could,among other things, adversely impact the trading price of the Notes and our shares issuable upon conversion of the Notes. Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay oursubstantial indebtedness. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the notes issued in our privateoffering completed on January 23, 2013, or Notes, as described below, or to make cash payments in connection with any conversion of the Notes depends onour future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flowfrom operations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we are unable to generate such cash flow, wemay be required to adopt one or more alternatives, such as selling assets, restructuring indebtedness or obtaining additional equity capital on terms that maybe onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We maynot be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. On January 23, 2013, the Company completed a private offering of $120.0 million in aggregate principal amount of 3.25% convertible senior notes due2019 and entered into an indenture with Wells Fargo Bank, National Association, a national banking association, as trustee, governing the Notes. The Notesaccrue interest at a rate of 3.25% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2013. The Noteswill mature on February 1, 2019. As of December 31, 2013, our total consolidated gross indebtedness was $120.0 million, all of which was unsecured indebtedness, and our subsidiarieshad no indebtedness (in each case, excluding trade payables, intercompany liabilities and income tax-related liabilities).Despite our current indebtedness levels, we may still incur substantially more indebtedness or take other actions which would intensify the risksdiscussed above. Despite our current consolidated indebtedness levels, we and our subsidiaries may be able to incur substantial additional indebtedness in the future,subject to any restrictions contained in our then-existing debt instruments, some of which may be secured indebtedness. We are not restricted under the termsof the indenture governing the Notes from incurring additional indebtedness, securing existing or future indebtedness, recapitalizing our indebtedness or takinga number of other actions that could have the effect of diminishing our ability to make payments on the Notes or any future indebtedness.41Table of ContentsWe may not have the ability to raise the funds necessary to settle conversions of the Notes in cash to the extent required or to repurchase the Notesupon a fundamental change, and our future indebtedness may contain limitations on our ability to pay cash upon conversion of the Notes orlimitations on our ability to repurchase the Notes. Holders of the Notes will have the right to require us to repurchase their Notes upon the occurrence of a fundamental change at a repurchase price equal to100% of their principal amount, plus accrued and unpaid interest, if any. In addition, upon conversion of the Notes, we will be required to make cashpayments for each $1,000 in principal amount of Notes converted of at least the lesser of $1,000 and the sum of the daily conversion values. However, wemay not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or Notes beingconverted. Any credit facility or other agreement that we may enter into may limit our ability to make cash payments at the time of a fundamental change orupon conversion of the Notes. Further, our ability to repurchase the Notes or to pay cash upon conversions of the Notes may be limited by law, by regulatoryauthority or by agreements governing our future indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the indenture or topay any cash payable on future conversions of the Notes as required by the indenture would constitute a default under the indenture. A default under theindenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the relatedindebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase theNotes or make cash payments upon conversions thereof.The conditional conversion feature of the Notes, if triggered and elected, may adversely affect our financial condition and operating results. Under certain circumstances, holders of the Notes are entitled to convert the Notes to common stock at any time during specified periods at their option.If one or more holders elect to convert their Notes, we would be required to settle any converted principal through the payment of cash, which could adverselyaffect our liquidity. In addition, even if holders do not elect to convert their Notes, we have reclassified all of the outstanding principal of the Notes as a currentrather than long-term liability, which has resulted in a material reduction of our net working capital.Conversion of the Notes may dilute the ownership interest of existing stockholders, including holders who had previously converted their Notes,or may otherwise depress the price of our common stock.The conversion of the Notes into shares of our common stock, to the extent that we choose not to deliver all cash for the conversion value in excess of theprincipal amount, will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon conversionof the Notes could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling bymarket participants due to this dilution or may facilitate trading strategies involving the Notes and our common stock.Future sales in the public market or issuances of our common stock could lower the market price for our common stock and adversely impact thetrading price of the Notes. In the future, we may sell additional shares of our common stock to raise capital. Except under limited circumstances, we are not restricted from issuingadditional common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. The issuanceof additional shares of our common stock or convertible securities, including upon exercise of our outstanding options or otherwise, will dilute the ownershipinterest of our common stockholders. In addition, our greater than 5% stockholders may sell a substantial number of their shares in the public market, whichcould also affect the market price for our common stock. We cannot predict the size of future sales or issuances of our common stock or the effect, if any, thatthey may have on the market price for our common stock. The liquidity and trading volume of our common stock is limited. For the three months endedDecember 31, 2013, the average per day trading volume of our common stock was 490,136 shares. The issuance and/or sale of substantial amounts ofcommon stock, or the perception that such issuances and/or sales may occur, could adversely affect the market price of our common stock and the tradingprice of the Notes and impair our ability to raise capital through the sale of additional equity or debts securities.The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reportedfinancial results. In May 2008, the Financial Accounting Standards Board, which we refer to as FASB, issued FASB Staff Position No. APB 14-1, Accounting forConvertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), which has subsequently been codified asAccounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20. Under ASC 470-20, an entity mustseparately account for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially incash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equitycomponent is required to be included in the additional paid-in capital section of stockholders' equity on our consolidated balance sheet at the issuance date andthe value of the equity component would be treated as debt discount for purposes of accounting for the debt component of the Notes. As a result, we arerequired to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value ofthe Notes to42Table of Contentstheir face amount over the term of the Notes. We will report larger net losses in our financial results because ASC 470-20 will require interest to include both thecurrent period's amortization of the debt discount and the instrument's coupon interest, which could adversely affect our reported or future financial results,the trading price of our common stock and the trading price of the Notes. In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currentlyaccounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in thecalculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stockmethod, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settlesuch excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit theuse of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, thenour net losses per share would be increased.Holders of the Notes will not be entitled to any rights with respect to our common stock, but will be subject to all changes made with respect to themto the extent our conversion obligation includes shares of our common stock. Holders of Notes will not be entitled to any rights with respect to our common stock (including, without limitation, voting rights and rights to receive anydividends or other distributions on our common stock) prior to the last trading day of the observation period, but, to the extent our conversion obligationincludes shares of our common stock, holders of Notes will be subject to all changes affecting our common stock. For example, if an amendment is proposedto our certificate of incorporation or bylaws requiring stockholder approval and the record date for determining the stockholders of record entitled to vote on theamendment occurs prior to the last trading day of the relevant observation period, then to the extent our conversion obligation includes shares of our commonstock, such holder will not be entitled to vote on the amendment, although such holder will nevertheless be subject to any changes affecting our common stockas a result of such amendment.Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others,even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our currentmanagement. Provisions in our restated certificate of incorporation and our bylaws, as well as provisions of the Delaware General Corporation Law, or DGCL, couldmake it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, includingtransactions in which stockholders might otherwise receive a premium for their shares. These provisions include:•authorizing the issuance of "blank check" preferred stock, the terms of which may be established and shares of which may be issued withoutstockholder approval; •prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; •eliminating the ability of stockholders to call a special meeting of stockholders; and •establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon atstockholder meetings. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult forstockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are subject toSection 203 of the DGCL, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with aninterested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions areapproved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by orbeneficial to our stockholders.We do not intend to pay dividends on our common stock for the foreseeable future. We have never declared or paid cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the furtherdevelopment and expansion of our business and do not intend to pay cash dividends in the foreseeable future. Any future determination to pay dividends willbe at the discretion of our board of directors and will depend upon our financial condition, results of operations, capital requirements, restrictions contained infuture financing instruments and such other factors as our board of directors deems relevant.Item 1B. Unresolved Staff CommentsNone.43Table of ContentsItem 2. PropertiesOur research and development and manufacturing facilities are located in San Diego, California, where we occupy two facilities totaling approximately106,000 square feet under leases expiring in August 2020. We use these facilities for research and development, manufacturing and general and administrativepurposes. We also occupy a warehouse in San Diego primarily used for the storage of inventory under a lease expiring in August 2020. In addition, wemaintain our executive offices and our commercial and business development facility in Parsippany, New Jersey, where we occupy approximately 13,000square feet under a lease expiring in July 2017.We believe that our manufacturing facilities will be sufficient for our needs with Suites A and C. We intend to add new facilities or expand existingfacilities as we add employees, expand our geographic markets and as demand for EXPAREL increases and we believe that suitable additional or substitutespace will be available as needed to accommodate any such expansion of our operations.Item 3. Legal ProceedingsFrom time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of our business. We are notpresently a party to any litigation that we believe to be material and we are not aware of any pending or threatened litigation against us that we believe couldhave a material adverse effect on our business, operating results, financial condition or cash flows.Item 4. Mine Safety DisclosuresNot applicable.44Table of ContentsPART IIItem 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock has been listed under the symbol "PCRX" on The NASDAQ Global Select Market since January 2, 2013. Our common stock waslisted on The NASDAQ Global Market from our initial public offering on February 3, 2011 until January 1, 2013. Prior to our initial public offering, therewas no public market for our common stock. The following table sets forth, for the periods indicated, the high and low intraday sales prices of our commonstock as reported by NASDAQ:Year Ended 2013High LowFourth Quarter$58.22 $45.68Third Quarter49.45 28.79Second Quarter32.36 24.70First Quarter30.94 17.15Year Ended 2012High LowFourth Quarter$19.09 $15.07Third Quarter19.31 14.00Second Quarter16.93 9.60First Quarter12.01 7.38On February 14, 2013, the closing price of our common stock as reported on The NASDAQ Global Select Market was $68.02 per share and we hadapproximately 23 holders of record of our common stock.45Table of ContentsComparison of Cumulative Total Returns Since Our IPO * Cumulative Total Return February 3, 2011 December 31, 2011 December 31, 2012 December 31, 2013Pacira Pharmaceuticals, Inc. (PCRX)$100.00 $123.22 $248.86 $818.95NASDAQ Composite (^IXIC)100.00 94.60 109.65 151.66NASDAQ Biotechnology (^NBI)100.00 111.01 146.42 242.49* Assumes $100 invested on February 3, 2011, the date of our IPO (including reinvestment of dividends).DIVIDEND POLICYWe have never declared or paid any cash dividends on our capital stock. We currently intend to retain earnings, if any, to finance the growth anddevelopment of our business. We do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any,will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions containedin future financing instruments, provisions of applicable law and other factors the board deems relevant.Item 6. Selected Financial DataThe table below provides selected consolidated financial data. We have prepared this information using our audited consolidated financial statementsfor the years ended December 31, 2013, 2012, 2011, 2010 and 2009. The following consolidated financial data should be read in conjunction with ourconsolidated financial statements and related notes included in this report and "Item 7 - Management's Discussion and Analysis of Financial Condition andResults of Operations" of this annual report.46Table of Contents Year Ended December 31, 2013 2012 2011 2010 2009 (In thousands, except share and per share data)Statement of Operations Data Revenues: Net product sales$81,956 $18,191 $6,895 $7,640 $6,324Collaborative licensing and development revenue972 18,390 5,074 3,217 4,638Royalty revenue2,623 2,503 3,720 3,705 4,044Total revenues85,551 39,084 15,689 14,562 15,006Operating expenses: Cost of revenues54,772 32,139 16,739 12,276 12,301Research and development21,560 9,937 14,873 18,628 26,233Selling, general and administrative62,508 46,306 20,159 6,367 5,020Impairment of long-lived assets— — 3,019 — —Total operating expenses138,840 88,382 54,790 37,271 43,554Loss from operations(53,289) (49,298) (39,101) (22,709) (28,548)Other (expense) income: Interest income259 275 255 146 77Interest expense(7,253) (1,807) (4,780) (3,959) (1,723)Loss on early extinguishment of debt(3,398) (1,062) — (184) —Royalty interest obligation(623) (278) 227 (930) (1,880)Other, net(47) (111) 71 487 367Total other expense, net(11,062) (2,983) (4,227) (4,440) (3,159)Loss before income taxes(64,351) (52,281) (43,328) (27,149) (31,707)Income tax benefit442 — — — —Net loss$(63,909) $(52,281) $(43,328) $(27,149) $(31,707)Net loss per share: Basic and diluted net loss per common share$(1.93) $(1.72) $(2.64) $(47.29) $(55.32)Weighted average common shares outstanding: Basic and diluted33,181,895 30,331,965 16,437,464 574,072 573,118 December 31, 2013 2012 2011 2010 2009 (In thousands)Balance Sheet Data Cash and cash equivalents, restricted cash and short-term investments$73,785 $42,573 $77,452 $27,447 $8,293Working capital (deficit)(15,192) 46,766 50,738 14,733 (1,868)Total assets169,820 112,054 113,490 66,562 43,954Long-term liabilities6,628 32,043 33,310 98,623 52,486Accumulated deficit(296,429) (232,520) (180,239) (136,911) (109,762)Total stockholders' equity (deficit)41,249 65,855 48,269 (48,383) (22,949)47Table of ContentsItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and thenotes to those financial statements appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statementsthat involve significant risks and uncertainties. As a result of many factors, such as those set forth under "Risk Factors" in Part I, Item 1A of thisAnnual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.OverviewWe are a specialty pharmaceutical company focused on the development, commercialization and manufacture of proprietary pharmaceutical products,based on our proprietary DepoFoam drug delivery technology, for use in hospitals and ambulatory surgery centers. As of December 31, 2013, our commercialstage products are EXPAREL and DepoCyt(e).•EXPAREL is a liposome injection of bupivacaine, an amide-type local anesthetic, indicated for administration into the surgical site to producepostsurgical analgesia and was approved by the FDA on October 28, 2011. We commercially launched EXPAREL in April 2012. We shipEXPAREL directly to the end user based on orders placed to wholesalers or directly to us and have no product held by wholesalers.•DepoCyt(e) is a sustained release liposomal formulation of the chemotherapeutic agent cytarabine and is indicated for the intrathecal treatment oflymphomatous meningitis. DepoCyt(e) was granted accelerated approval by the FDA in 1999 and full approval in 2007. We sell DepoCyt(e) toour commercial partners located in the U.S. and Europe.Since inception, we have incurred significant operating losses. We expect to continue to incur significant expenses as we commercialize EXPAREL;advance the development of product candidates; pursue the use of EXPAREL in additional indications such as nerve block; seek FDA approval for ourproduct candidates that successfully complete clinical trials; and develop our sales force and marketing capabilities to prepare for their commercial launch.2013 Highlights and Developments•Since the commercial launch of EXPAREL in April 2012 through December 31, 2013, 2,106 accounts have ordered EXPAREL, and during theyear ended December 31, 2013, we added 1,287 new accounts. We believe the strong demand for EXPAREL has continued due to major hospitalformulary wins and orders from orthopedic centers.•Total revenues increased $46.5 million, or 119%, in the year ended December 31, 2013, as compared to 2012, primarily driven by productsales of EXPAREL of $76.2 million, net of allowances for sales returns, prompt payment discounts, volume rebates and distribution servicefees payable to wholesalers, for the year ended December 31, 2013.•In January 2013, we completed a private placement of $120.0 million in aggregate principal amount of 3.25% convertible senior notes, or Notes.The net proceeds from the offering, including net proceeds from the exercise in full by the initial purchasers of their option to purchase anadditional $10.0 million in aggregate principal amount of the Notes, were $115.3 million, after deducting the initial purchasers' discounts andcommissions and the offering expenses payable by us.•We internalized the approximately 60-person sales force previously employed by Quintiles Commercial US, Inc., or Quintiles, and furtherdeveloped a sales and marketing team entirely dedicated to commercializing EXPAREL.•In May 2013, we reported positive findings from the first part of our femoral nerve block study comparing the effect of EXPAREL versusplacebo for total knee arthroplasty, which was initiated in 2012. The final part of this study is still ongoing and we expect to have final data inMarch 2014.•In August 2013, we reported that the intercostal nerve block study for posterolateral thoracotomy, which was also initiated in 2012, did notachieve its primary endpoint. However, the FDA has previously indicated to us at its end of Phase 2 meeting that a single pivotal trial meeting itsprimary endpoint would be sufficient to gain approval for the nerve block indication, assuming demonstration of adequate safety. We plan tosubmit data from the ongoing48Table of Contentsfemoral nerve block study to demonstrate efficacy and safety, as well as safety data from the intercostal nerve block study, for an sNDA, whichis anticipated in the second quarter of 2014.•Following a pilot program, effective October 1, 2013, we appointed CrossLink BioScience, LLC, or CrossLink, for a term of five years as theexclusive third-party distributor to promote and sell EXPAREL for orthopedic and spine surgeries in the United States, with the exception ofcertain geographical areas and accounts.•We continued the expansion of our manufacturing facility located in San Diego, California, and we anticipate receiving FDA approval for ournewly installed manufacturing facility, referred to as Suite C, in the second quarter of 2014. Combined with our current facility, we expect thisfacility to significantly increase our manufacturing capacity and ability to meet the growing demand for EXPAREL.•Research and development expenses increased by $11.6 million, or 117%, for the year ended December 31, 2013, as compared to 2012, drivenby, among other things, an increase in clinical development expenses relating to our nerve block trials, described above. We expect to incuradditional research and development expenses as we accelerate the development of EXPAREL in additional indications, including nerve blockand the pediatric trials required by the FDA for EXPAREL.Financial Operations OverviewRevenueOur net product sales are derived from EXPAREL, which we commercially launched in April 2012 in the United States, and DepoCyt(e), which we sellto commercial partners in the United States and Europe. We ship EXPAREL directly to the end user based on orders placed to wholesalers or directly to us. Noproduct is held by wholesalers. We reported EXPAREL product sales of $76.2 million for the year ended December 31, 2013, which is net of allowances forsales returns, prompt payment discounts, volume rebates and distribution service fees payable to wholesalers. DepoCyt(e) net product sales of $5.7 millionfor the year ended December 31, 2013 were derived from a contractual price on shipments to our commercial partners.We also generate collaborative licensing and development revenue from our collaborations with third parties who seek to use our DepoFoam technology todevelop extended release formulations of their products and product candidates.Royalties are recognized as the product is sold by our commercial partners and are calculated as a percentage of the net selling price, which is typicallynet of discounts, returns and allowances incurred by our commercial partners, and net of the agreed upon supply price.Cost of RevenuesOur cost of revenues consists of the costs associated with our products sold and research and development services provided to our collaborationpartners and include the following:•manufacturing overhead and fixed costs associated with running two current Good Manufacturing Practices, or cGMP, manufacturingfacilities, including allocated rent, utilities, insurance, depreciation and salaries and related costs of personnel, including stock-basedcompensation, involved with our manufacturing activities;•cost of active pharmaceutical ingredients;•royalties due to third parties on our revenues;•packaging, testing and freight;•amortization of our intangible assets;•regulatory and pharmacovigilance costs; and•cost associated with excess manufacturing capacity and any non-routine shutdown of our facilities, which are charged to cost of revenue asincurred.Our cost of revenues increased significantly following FDA approval of EXPAREL in October 2011, when we shifted EXPAREL manufacturingexpenses on a prospective basis from research and development to cost of revenues.49Table of ContentsResearch and Development ExpensesOur historical research and development expenses primarily consist of expenses incurred in developing, testing, manufacturing and seeking regulatoryapproval of EXPAREL, including:•expenses associated with regulatory submissions, clinical trials and manufacturing, including additional expenses to prepare for thecommercial manufacture of EXPAREL prior to FDA approval;•payments to third-party contract research organizations, contract laboratories and independent contractors;•payments made to consultants who perform research and development on our behalf and assist us in the preparation of regulatory filings;•personnel related expenses, such as salaries, benefits, travel and other related expenses, including stock-based compensation;•payments made to third-party investigators who perform research and development on our behalf and clinical sites where such research anddevelopment is conducted; and•allocated rent and utilities, depreciation and amortization, and other related expenses.Clinical trial expenses for our product candidates are a significant component of our current research and development expenses. Product candidates inlater stage clinical development generally have higher research and development expenses than those in earlier stages of development, primarily due to theincreased size and duration of the clinical trials. We coordinate clinical trials through a number of contracted investigational sites and recognize the associatedexpense based on a number of factors, including actual and estimated subject enrollment and visits, direct pass-through costs and other clinical site fees.From the acquisition date through December 31, 2013, we incurred research and development expenses of $145.2 million, which has primarily been forEXPAREL. We have also incurred expenses for our product candidates, including DepoNSAID and DepoMethotrexate. We expect to incur additional researchand development expenses as we accelerate the development of EXPAREL in additional indications including nerve block and the pediatric trials required bythe FDA for EXPAREL. Completion of clinical trials may take several years or more and the length of time generally varies according to the type, complexity,novelty and intended use of a product candidate. We are currently unable to determine our future research and development expenses related to EXPARELbecause the requirements of any additional clinical trials of EXPAREL for additional indications have yet to be determined. For example, the FDA has requiredthat we complete a post-approval clinical trial for EXPAREL in pediatric patients. The cost of clinical development may vary significantly due to factors suchas the scope, rate of progress, expense and outcome of our clinical trials and other development activities.Selling, General and Administrative ExpensesSelling, general and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, forpersonnel serving in our sales and marketing, executive, finance, legal, information technology, compliance and human resource functions. Our selling,general and administrative expenses also include facility and related costs, professional fees for legal, patent expenses, consulting, tax and accounting services,insurance, depreciation and general corporate expenses.Our selling, general and administrative costs have increased significantly since we have focused significant resources on building our commercial teamfor the launch and commercial sale of EXPAREL. Following approval of EXPAREL in October 2011, we hired and trained our Quintiles sales force whichwas comprised of approximately 60 representatives, whom we transitioned to our employees on January 28, 2013. In 2013, we also hired CrossLink topromote and sell EXPAREL for orthopedic and spine surgeries. We continue to run prospective outcome studies designed for commercial purposes, which donot have any regulatory endpoints and are included in selling, general and administrative expenses. We expect to continue to incur significant selling, generaland administrative expenses as we continue to execute our marketing and sales strategies for EXPAREL and implement a variety of programs to educatecustomers about EXPAREL.Interest Income (Expense)Interest income consists of interest earned on our cash and cash equivalents and short-term investments.Interest expense primarily consists of cash and non-cash interest costs related to our debt holdings. We capitalize interest based on the construction costsfor our Suite C manufacturing lines. During 2011, we also incurred interest expense associated with our secured and unsecured notes issued to certain of ourinvestors that converted into common stock upon completion of our initial public offering and negotiated rent deferral payments.50Table of ContentsLoss on Early Extinguishment of DebtLoss on early extinguishment of debt consists of any remaining unamortized debt issuance costs, warrants and end of term fee, as well as anyprepayment penalties, resulting from the prepayment of debt.Royalty Interest ObligationOur royalty interest obligation is due under an Amended and Restated Royalty Interests Assignment Agreement, further discussed in "Liquidity andCapital Resources," which provides Paul Capital a right to receive an interest in end user sales relating to DepoCyt(e) and our previously-marketed product,DepoDur. The obligations under the agreement are composed of (i) the difference in the revaluation of our obligations between each reporting period and (ii) theactual royalty interest payments payable for such reporting period.We record our royalty interest obligation as a liability in our consolidated balance sheets in accordance with ASC 470-10-25, Sales of Future Revenues.We impute interest expense associated with this liability using the effective interest rate method. The effective interest rate may vary during the term of theagreement depending on a number of factors including the actual sales of the products and a significant estimation, performed quarterly, of certain of ourfuture cash flows related to these products during the remaining term of the Amended and Restated Royalty Interests Assignment Agreement which terminateson December 31, 2014. The effect of the change in the estimates is reflected in our consolidated statements of operations as a royalty interest obligation. Inaddition, such cash flows are subject to foreign exchange movements related to sales of the products denominated in currencies other than U.S. dollars.Income Tax Expense (Benefit)Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s assessment of estimatedfuture taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense. As of December 31, 2013, wehave significant federal and state income tax net operating loss and credit carry forwards, the use of which may be limited by historic and future ownershipchanges within the meaning of Section 382 of the Internal Revenue Code. Based on the positive and negative evidence available, we believe that it is more likelythan not that the benefit from deferred tax assets will not be realized. In recognition of this risk, we have provided a full valuation allowance against ourdeferred tax assets net of deferred tax liabilities that will generate taxable income during the reversal period.Critical Accounting Policies and Use of EstimatesWe have based our management's discussion and analysis of our financial condition and results of operations on our financial statements that have beenprepared in accordance with generally accepted accounting principles, or GAAP, in the United States. The preparation of these financial statements requires usto make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financialstatements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments,including those related to clinical trial expenses and stock-based compensation. We base our estimates on historical experience and on various other factors webelieve to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.While our significant accounting policies are more fully discussed in Note 2 to our audited consolidated financial statements included in this filing, webelieve that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidatedfinancial statements.Revenue RecognitionOur principal sources of revenue include (i) sales of EXPAREL in the United States, (ii) sales of DepoCyt(e) in the United States and Europe, (iii)royalties based on sales by commercial partners of DepoCyt(e), and (iv) license fees, milestone payments and reimbursement for development work to thirdparties. We recognize revenue when there is persuasive evidence that an arrangement exists, title has passed, collection is reasonably assured and the price isfixed or determinable.Net Product SalesWe sell EXPAREL through a drop-ship program under which orders are processed through wholesalers based on orders of the product placed by endusers which include hospitals, ambulatory surgery centers and doctors. EXPAREL is delivered directly to the end user with the wholesaler never takingphysical possession of the product. We record revenue at the time the product is delivered to the end user. We also recognize revenue from productsmanufactured and supplied to commercial51Table of Contentspartners, such as DepoCyt(e) upon shipment. Prior to the shipment of manufactured products, we conduct initial product release and stability testing inaccordance with cGMP.At the time we recognize revenue, we also record certain sales reserves and allowances as a reduction of revenue. These reserves and allowances include aprompt payment reserve, return reserves, volume rebates, chargeback reserve and wholesaler service fee. Due to estimates and assumptions inherent indetermining some of our sales reserves, the actual amount of volume rebates, chargebacks and returns may be different from our estimates, at which time wewould adjust our reserves accordingly.Prompt Payment ReserveThe prompt payment reserve is based upon discounts offered to wholesalers as an incentive to meet certain payment terms. We account for thesediscounts at the time the sale is made and reduce accounts receivable accordingly.Returns ReserveWe allow customers to return product that is damaged or received in error. In addition, we allow for product to be returned beginning six months prior to,and twelve months following product expiration. As EXPAREL is a new commercially available product, we are estimating our sales return reserve based onreturn history from other hospital based products with similar distribution models, which we believe is the best estimate of the anticipated product to bereturned. The returns reserve is recorded at the time of sale as a reduction to sales and an increase in returns liability.Our commercial partners can return the products within contractually specified timeframes if the products do not meet the applicable inspection tests.We estimate our return reserves based on our experience with historical return rates. Historically, our product returns have not been material.Volume Rebates and Chargeback ReserveVolume rebates and chargeback reserve are based upon contracted discounts and promotional offers we provide to certain end users such as members ofgroup purchasing organizations. The volume rebates and chargeback reserve are recorded as a reduction to sales and a customer payable and reduction toreceivables, respectively.Wholesaler Service FeeOur customers include major and regional wholesalers with whom we have contracted a fee for service based on a percentage of sales. This fee forservice is recorded as a reduction to gross sales and a liability is established at the time the sale is recorded based on the contracted percentage.Royalty RevenueWe recognize revenue from royalties based on our commercial partners' net sales of products. Royalties are recognized as earned in accordance withcontract terms when they can be reasonably estimated and collectability is reasonably assured. Our commercial partners are obligated to report their netproduct sales and the resulting royalty due to us within 60 days from the end of each quarter. Based on historical product sales, royalty receipts and otherrelevant information, we accrue royalty revenue each quarter and subsequently true-up our royalty revenue when we receive royalty reports from ourcommercial partners.Collaborative Licensing and Development RevenueWe recognize revenue from reimbursements received in connection with feasibility studies and development work for third parties who desire to utilizeour DepoFoam extended release drug delivery technology for their products when our contractual services are performed, provided collectability is reasonablyassured. Our principal costs under these agreements include costs for our personnel conducting research and development, our allocated overhead, as well asresearch and development performed by outside contractors or consultants.We recognize revenues from non-refundable up-front license fees received under collaboration agreements ratably over the performance period asdetermined under the collaboration agreement (estimated development period in the case of development agreements, and contract period or longest patent life inthe case of supply and distribution agreements). If the estimated performance period is subsequently modified, we will modify the period over which the up-front license fee is recognized accordingly on a prospective basis. Upon notification of the termination of a collaboration agreement, any remaining non-refundable license fees received by us, which had been deferred, are recognized over the remaining contractual term. If the termination is immediate and noadditional services are to be performed, the deferred revenue is generally recognized in full. All such recognized revenues are included in collaborative licensingand development revenue in our consolidated statements of operations.52Table of ContentsWe recognize revenue from milestone payments received under collaboration agreements when earned, provided that the milestone event is substantive,its achievability was not reasonably assured at the inception of the agreement, we have no further performance obligations relating to the event and collectabilityis reasonably assured. If these criteria are not met, we recognize milestone payments ratably over the remaining period of our performance obligations under theapplicable collaboration agreement.Research and Development ExpensesWe expense all research and development costs as incurred. We rely on third parties to conduct our preclinical and clinical studies and to provideservices, including data management, statistical analysis and electronic compilation for our clinical trials. We track and record information regarding third-party research and development expenses for each study or trial that we conduct and recognize these expenses based on the estimated progress towardscompletion at the end of each reporting period. Factors we consider in preparing these estimates include the number of subjects enrolled in studies, milestonesachieved and other criteria related to the efforts of our vendors. Historically, any adjustments we have made to these assumptions have not been material.Depending on the timing of payments to vendors and estimated services provided, we may record prepaid or accrued expenses related to these costs.Stock-Based CompensationWe account for stock-based compensation by measuring and recognizing compensation expense for all stock-based awards based on estimated grant datefair values. We use the straight-line method to allocate compensation cost to reporting periods over each optionee's requisite service period, which is generallythe vesting period. Because the valuation of stock options is inherently subjective, we estimate the fair value of our stock-based awards using the Black-Scholes option valuation model, or Black-Scholes model. The Black-Scholes model requires the input of subjective assumptions, including the expected stockprice volatility, the calculation of expected term, and the fair value of the underlying common stock on the date of grant, among other inputs.The following table summarizes our assumptions used in the Black-Scholes model: Year Ended December 31, 2013 2012 2011Expected dividend yieldNone None NoneRisk free interest rate0.33 - 2.83% 0.84 - 1.70% 1.1 - 2.7%Expected volatility68.7% 74.0% 76.8%Expected term of options6.22 years 6.76 years 6.73 years•Expected Volatility—The expected volatility rate used to value stock option grants is based on volatilities of a peer group of similar companieswhose share prices are publicly available. Since our initial public offering, we have utilized our available historic volatility data combinedwith the publicly traded peer historic volatility to determine expected volatility over the expected option term. The peer group was developedbased on companies in the pharmaceutical and biotechnology industry in a similar stage of development.•Expected Term—We elected to utilize the "simplified" method for "plain vanilla" options to estimate the expected term of stock option grants.Under this approach, the weighted average expected life is presumed to be the average of the vesting term and the contractual term of theoption.•Risk-Free Interest Rate—The risk-free interest rate assumption was based on zero coupon U.S. Department of the Treasury instruments thathad terms consistent with the expected term of our stock option grants.•Expected Dividend Yield—We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in theforeseeable future.Results of OperationsComparison of Years Ended December 31, 2013, 2012 and 2011RevenuesThe following table provides information regarding our revenues during the periods indicated, including changes as a percentage (dollar amounts inthousands):53Table of Contents Year Ended December 31, 2013 versus2012 2012 versus2011 2013 2012 2011 % Increase / (Decrease)Net product sales: EXPAREL$76,218 $14,591 $— 422 % N/ADepoCyt(e)5,738 3,537 6,812 62 % (48)%DepoDur— 63 83 (100)% (24)%Total net product sales81,956 18,191 6,895 351 % 164 %Collaborative licensing and development revenue972 18,390 5,074 (95)% 262 %Royalty revenue2,623 2,503 3,720 5 % (33)%Total revenues$85,551 $39,084 $15,689 119 % 149 %Total revenues increased $46.5 million, or 119%, in the year ended December 31, 2013, as compared to 2012, and net product sales increased $63.8million, or 351%, in the year ended December 31, 2013, as compared to 2012. These increases were driven primarily from the increase in sales of EXPARELby $61.6 million, or 422%, in 2013, as compared to 2012, resulting from both a full year of EXPAREL sales in 2013 and continued penetration into the softtissue and orthopedic markets. Since the launch of EXPAREL in April of 2012 through the year ended December 31, 2013, 2,106 accounts have orderedEXPAREL. During the year ended December 31, 2013, we added 1,287 new accounts. The strong demand for EXPAREL has continued as a result of majorhospital system formulary wins due to rapid adoption in orthopedic procedures as well as continued adoption of infiltration into the transversus abdominisplane, or iTAP, for abdominal and genitourinary surgeries. There have also been positive indications of demand growth due to approval for use of EXPARELat major military institutions, as well as the completion of drug evaluations leading to a reduction of restrictions and thus improved physician access.DepoCyt(e) product sales increased $2.2 million in the year ended December 31, 2013, as compared to 2012, driven by the lifting of a selective recallrecommended by the European Medicines Agency where DepoCyt(e) was not considered to be an "essential medicinal product," which resulted in decreasedsales in 2012.The decrease in collaborative licensing and development revenue of $17.4 million, or 95%, in the year ended December 31, 2013, as compared to 2012,was primarily driven by the recognition of deferred revenue in connection with the termination of certain licensing agreements in 2012, which included(i) $11.6 million for EKR Therapeutics, Inc, or EKR, (ii) $4.0 million for Novo Nordisk AS, or Novo, and (iii) $1.8 million for Flynn PharmaceuticalsLimited, or Flynn. We recognized any unamortized deferred revenue related to any milestones received under these agreements over the remaining contractperiods, which ended in 2012.Total revenues increased $23.4 million, or 149%, in the year ended December 31, 2012, as compared to 2011. Net product sales increased $11.3million, or 164%, in the year ended December 31, 2012, as compared to 2011. In April 2012, we commercially launched EXPAREL resulting in $14.6million of net product sales during 2012. The increase in EXPAREL product sales was partially offset by a $3.3 million decrease in DepoCyt(e) product salesprimarily driven by the selective recall of DepoCyt(e) in Europe.The increase in collaborative licensing and development revenue of $13.3 million, or 262%, in the year ended December 31, 2012, as compared to 2011was primarily driven by the recognition of deferred revenue in connection with the termination of certain licensing agreements, which included increases of (i)$10.7 million for EKR, (ii) $1.1 million for Novo and (iii) $1.5 million for Flynn. We recognized any unamortized deferred revenue related to any milestonesreceived under these agreements over the remaining contract periods, which ended in 2012. Royalty revenue decreased $1.2 million, or 33%, in the year endedDecember 31, 2012, as compared to 2011 due to lower end user sales by our commercial partners due to the selective recall of DepoCyt(e) in Europe.54Table of ContentsCost of RevenuesThe following table provides information regarding our cost of revenues during the periods indicated, including changes as a percentage (dollar amountsin thousands): Year Ended December 31, 2013 versus2012 2012 versus 2011 2013 2012 2011 % Increase / (Decrease)Cost of goods sold$54,772 $31,744 $15,310 73 % 107 %Cost of collaborative licensing and development— 395 1,429 (100)% (72)%Total cost of revenues$54,772 $32,139 $16,739 70 % 92 %Total cost of revenues increased $22.6 million, or 70% in the year ended December 31, 2013 as compared to 2012. Cost of goods sold increasedprimarily due to a higher volume of EXPAREL sales. The improvement in cost of goods sold as a percentage of net product sales during the year endedDecember 31, 2013 as compared to 2012 was driven by (i) increased utilization of our facility to manufacture EXPAREL, (ii) a decrease in consulting costs,(iii) the significant increase in EXPAREL sales to offset the substantial level of fixed cost infrastructure for operating two cGMP facilities and (iv) theresumption of production of DepoCyt(e). This improvement was partially offset by the impact of producing Suite C batches in preparation for FDA approvalsubmission, which cannot be sold for commercial use and resulted in $3.7 million of expense during the year ended December 31, 2013. There was no cost ofcollaborative licensing and development revenue for the year ended December 31, 2013 due to the termination of services performed under a licensing agreementwith Novo in 2012.Total cost of revenues increased $15.4 million, or 92% in the year ended December 31, 2012 as compared to 2011. Cost of goods sold increased by$16.4 million primarily due to (i) the cost of goods for EXPAREL sales which we commercially launched in April 2012, (ii) approximately $3.2 million ofexpense for the voluntary but non-routine shutdown periods of the EXPAREL manufacturing site for repairs and maintenance and deployment of newmanufacturing skids for our Suite C manufacturing expansion project, (iii) $1.3 million charge for corrective actions taken on the DepoCyt(e) manufacturingline based on the remediation plan, inventory replacement and reserve costs due to action taken in response to the report issued by the European MedicinesAgency and (iv) EXPAREL production costs, which were previously expensed as incurred until March 2012 when the first commercial batch was produced.We have a substantial level of infrastructure cost relating to running two cGMP facilities and any extended or non-routine shutdown results in these costs beingcharged directly to cost of goods sold.Cost of collaborative licensing and development revenue decreased by $1.0 million in the year ended December 31, 2012 as compared to 2011 due todecreased services performed under the agreement with Novo for which we received a notice of termination in June 2012.Research and Development ExpensesThe following table provides information regarding research and development expenses during the periods indicated, including changes as a percentage(dollar amounts in thousands): Year Ended December 31, 2013 versus 2012 2012 versus 2011 2013 2012 2011 % Increase / (Decrease)Research and development$21,560 $9,937 $14,873 117% (33)%Research and development expenses increased by $11.6 million, or 117%, for the year ended December 31, 2013, as compared to 2012, primarily dueto the following:•Salaries and benefits increased by $3.6 million driven by a $3.2 million increase in stock-based compensation expense;•Clinical development expenses increased by $6.2 million relating to our Phase 2/3 pivotal trial of EXPAREL administered as a femoral nerveblock for total knee arthroplasty and our Phase 3 pivotal trial of EXPAREL as an intercostal nerve block for thoracotomy;•Product development expenses increased by $0.8 million related to a potential new manufacturing process for EXPAREL; and•Pre-clinical expenses increased by $0.7 million related to toxicity studies in animals.55Table of ContentsResearch and development expenses decreased by $4.9 million, or 33%, for the year ended December 31, 2012 as compared to 2011 primarily due to ashift of $10.6 million in EXPAREL related manufacturing development expenses to cost of goods sold following the approval of EXPAREL by the FDA inOctober 2011. This decrease was partially offset by an increase of $3.6 million in clinical development expenses primarily for the initiation of our Phase 2/3pivotal trial of EXPAREL administered as a single-dose injection femoral nerve block for total knee arthroplasty surgery, in which the first patient was dosedin September 2012, and start-up costs for our Phase 3 pivotal trial of EXPAREL for intercostal nerve block for thoracotomy. We also had an increase of $2.2million of research and development expenses on a potential new manufacturing process for EXPAREL.Selling, General and Administrative ExpensesThe following table provides information regarding selling, general and administrative expenses during the periods indicated, including changes as apercentage (dollar amounts in thousands): Year Ended December 31, 2013 versus2012 2012 versus2011 2013 2012 2011 % Increase / (Decrease)Sales and marketing$41,549 $30,332 $10,123 37% 200%General and administrative20,959 15,974 10,036 31% 59%Total selling, general and administrative expenses$62,508 $46,306 $20,159 35% 130%Selling, general and administrative expenses increased by $16.2 million, or 35%, in the year ended December 31, 2013 as compared to 2012 primarilydue to the following:•Sales and marketing expenses increased by $11.2 million to $41.5 million in the year ended December 31, 2013, as compared to $30.3million in the year ended December 31, 2012, due to a $8.0 million increase in project spend for EXPAREL, which included educationalinitiatives and programs to create product awareness in the orthopedic market, commission based payments to CrossLink, our Phase 4 trialfor infiltration into iTAP, along with other selling initiatives and promotional activities to support the growth of EXPAREL, and a $3.2 millionincrease in salaries and benefits driven by an increase in the number of our field-based medical health science personnel; and•General and administrative expenses increased by $5.0 million to $21.0 million in the year ended December 31, 2013, as compared to $16.0million in the year ended December 31, 2012, primarily due to increases in salaries and benefits, including $1.4 million of stock-basedcompensation expense, associated with our increased headcount, as well as infrastructure costs and outside services in areas such asinformation technology, human resources and finance to support the commercial and manufacturing growth of EXPAREL.Selling, general and administrative expenses increased by $26.1 million, or 130%, in the year ended December 31, 2012, as compared to 2011,primarily due to the following:•Sales and marketing expenses increased by $20.2 million to $30.3 million in the year ended December 31, 2012, as compared to $10.1million in the year ended December 31, 2011, due to a $12.4 million increase in salaries and benefits associated with our sales force entirelydedicated to commercializing EXPAREL, which was comprised of approximately 60 hospital specialists, seven regional directors and anational sales director; and a $4.6 million increase in project spending of which $3.0 million was promotional costs to support the launch ofEXPAREL, including simulcasts, speaker trainings, educational programs, publications, promotional materials and health outcomescollaboratives; and•General and administrative expenses increased by $5.9 million to $16.0 million in the year ended December 31, 2012, as compared to $10.0million in the year ended December 31, 2011, due to increases of $3.1 million in salaries and benefits associated with our increasedheadcount, and $2.0 million in consulting costs primarily to support our information technology structure and recruiting efforts.56Table of ContentsImpairment of Long-Lived AssetsThe following table provides information regarding impairment of long-lived assets during the periods indicated, including changes as a percentage(dollar amounts in thousands): Year Ended December 31, 2013 versus 2012 2012 versus2011 2013 2012 2011 % Increase / (Decrease)Impairment of long-lived assets$— $— $3,019 N/A (100)%During the year ended December 31, 2011, an impairment loss of $3.0 million was recognized relating to the following:•$1.7 million impairment of intangible assets and certain property, plant and equipment relating to DepoDur due to the notification by EKR inDecember 2011 of its intent to terminate our licensing, distribution and marketing agreement; and•$1.3 million impairment of property, plant and equipment due to our decision made during the fourth quarter of 2011 to change theautomation technology process in our EXPAREL production line to expand capacity resulting in certain software and equipment that were nolonger utilizable.Other Income (Expense)The following table provides information regarding other income (expense) during the periods indicated, including changes as a percentage (dollaramounts in thousands): Year Ended December 31, 2013 versus2012 2012 versus2011 2013 2012 2011 % Increase / (Decrease)Interest income$259 $275 $255 (6)% 8 %Interest expense(7,253) (1,807) (4,780) 301 % (62)%Loss on early extinguishment of debt(3,398) (1,062) — 220 % N/ARoyalty interest obligation(623) (278) 227 124 % *Other, net(47) (111) 71 (58)% *Total other expense, net$(11,062) $(2,983) $(4,227) 271 % (29)%* We do not believe the percentage change is meaningful.Total other expense, net increased by $8.1 million, or 271%, to $11.1 million in the year ended December 31, 2013 as compared to $3.0 million in2012, primarily due to a $5.4 million increase in interest expense. The increase in interest expense is due to the following:•$3.5 million increase driven by the amortization of the debt discount related to the equity component of the Notes;•$1.0 million increase related to interest expense on higher debt balances; and•$0.9 million decrease in capitalized interest related to our Suite C manufacturing expansion project due to a lower interest rate on our Notes ascompared to our term loan under the Oxford Credit Facility, which we repaid with the proceeds from the Notes offering.Additionally, in 2013 we incurred a $3.4 million loss on the extinguishment of the Oxford Credit Facility in January 2013 as compared to a $1.1 millionloss on extinguishment of the Hercules Credit Facility in May 2012.Total other expense, net decreased by $1.2 million, or 29%, to $3.0 million in the year ended December 31, 2012 as compared to $4.2 million in 2011,primarily due to a $3.0 million decrease in interest expense. The decrease in interest expense is due to the following:•$1.2 million increase in capitalized interest mostly related to our Suite C manufacturing expansion project;•$1.1 million decrease in warrant expense recognized during the first quarter of 2011 in connection with the conversion of these warrants uponour initial public offering; and57Table of Contents•$0.3 million decrease in interest expense associated with our 2009 and 2010 convertible and secured debt facilities which were converted tocommon shares in connection with our initial public offering in February 2011.Additionally, the decrease in interest expense was offset by a $1.1 million loss on the extinguishment of the HerculesCredit Facility in May 2012. We also recognized a $0.5 million increase in royalty interest obligation expense due to a forecastreduction in end user DepoCyt(e) sales that occurred in 2011 based on plateauing sales trends for DepoCyt(e), the weakeningEuro exchange rate and termination of the EKR agreement.Income Tax BenefitThe following table provides information regarding our income tax benefit during the periods indicated (in thousands): Year Ended December 31, 2013 versus2012 2012 versus2011 2013 2012 2011 % Increase / (Decrease)Income tax benefit$442 $— $— N/A N/AIn February 2013, we received $0.4 million from the sale of our unused net operating losses through the State of New Jersey’s Economic DevelopmentAuthority Technology Business Tax Certificate Transfer Program.Liquidity and Capital ResourcesSince our inception in 2007, we have devoted most of our cash resources to manufacturing, research and development and selling, general andadministrative activities primarily related to EXPAREL. We have financed our operations primarily with the proceeds from the sale of convertible preferredstock and common stock, secured and unsecured notes and borrowings under debt facilities, and revenues.We are highly dependent on the commercial success of EXPAREL, which we launched in April 2012. We have incurred losses and generated negativecash flows from operations since inception. As of December 31, 2013, we had an accumulated deficit of $296.4 million, cash and cash equivalents, restrictedcash and short-term investments of $73.8 million and a working capital deficit of $15.2 million.The following table summarizes our cash flows from operating, investing and financing activities for the years ended December 31, 2013, 2012 and2011 (in thousands): Year Ended December 31, 2013 2012 2011Consolidated Statement of Cash Flows Data: Net cash provided by (used in): Operating activities$(43,216) $(70,130) $(31,000)Investing activities(43,560) (29,522) (36,123)Financing activities89,165 63,610 87,158Net increase (decrease) in cash and cash equivalents$2,389 $(36,042) $20,035Operating ActivitiesFor the years ended December 31, 2013, 2012 and 2011, our net cash used in operating activities was $43.2 million, $70.1 million and $31.0 million,respectively. The $26.9 million decrease in net cash used in operating activities in 2013 as compared to 2012 was primarily driven by a $57.2 millionincrease in collections from EXPAREL net product sales, partially offset by increased operating expenses incurred for commercial manufacturing and thePhase 2/3 EXPAREL nerve block trials, increases in the number of our field-based medical health science personnel, and various promotional and educationalprograms to support EXPAREL.The $39.1 million increase in net cash used in operations in 2012 as compared to 2011 was primarily driven by (i) higher selling, marketing andadministrative expenses driven by the launch of EXPAREL in April 2012, including the hiring of our sales force dedicated to EXPAREL and our Phase 4 andretrospective studies, (ii) increased manufacturing costs and an increase in inventory in connection with our commercial launch of EXPAREL, and(iii) initiation of our Phase 2/3 EXPAREL nerve block trials.58Table of ContentsInvesting ActivitiesFor the years ended December 31, 2013, 2012 and 2011, our net cash used in investing activities was $43.6 million, $29.5 million and $36.1 million,respectively. The $14.0 million increase in net cash used in investing activities in 2013 as compared to 2012 was primarily due to a $27.8 million net increasein investment of the net proceeds from our Notes in short-term investments, partially offset by a $8.3 million decrease in contingent consideration payments toSkyepharma and a $5.5 million decrease in purchases of fixed assets.The $6.6 million decrease in net cash used in investing activities for 2012 as compared to 2011 was primarily driven by a $29.0 million decrease inthe purchases, net of redemptions, of short-term investments from the proceeds of our public offerings, partially offset by a (i) $10.0 million contingentmilestone payment made in April 2012 to Skyepharma in connection with the first commercial sale of EXPAREL, and a (ii) $12.1 million increase in thepurchase of fixed assets relating to the construction of our Suite C manufacturing lines for EXPAREL, which we re-commenced following approval from theFDA in October 2011.Financing ActivitiesFor the years ended December 31, 2013, 2012 and 2011, our net cash provided by financing activities was $89.2 million, $63.6 million and$87.2 million, respectively. During the year ended December 31, 2013, our net cash provided by financing activities was primarily attributable to our privateoffering of the Notes, which, after deducting financing costs, provided net proceeds of $115.3 million. We used $30.2 million of the net proceeds from theoffering of the Notes to repay in full the $27.5 million outstanding balance on the Oxford Credit Facility, as well as a $1.7 million end of term fee, a $0.8million early prepayment penalty, and $0.2 million of accrued interest.In April 2012, we raised $62.9 million in net proceeds through a follow-on public offering. Additionally, in May 2012, we borrowed a principal amountof $27.5 million from Oxford Finance LLC and used the funds primarily to repay the remaining principal on the Hercules Credit Facility of $24.2 million, anearly prepayment penalty of $0.3 million and the end of term fee of $0.6 million.Equity FinancingsFrom inception through December 31, 2013, we raised approximately $235 million of net proceeds from the sale of common stock and other equitysecurities.Common StockIn April 2012, we sold 6,900,000 shares at a price of $9.75 per share in a registered public offering of common stock. We raised approximately$62.9 million in net proceeds after deducting underwriting discounts and offering expenses.Debt FacilitiesJanuary 2013 Convertible NotesOn January 23, 2013, we completed our private offering of the Notes. The net proceeds from the offering were $115.3 million, after deducting the initialpurchasers' discounts and commissions and the offering expenses payable by us. The Notes accrue interest at a rate of 3.25% per year, payable semiannuallyin arrears on February 1 and August 1 of each year, beginning on August 1, 2013 and will mature on February 1, 2019.On or after August 1, 2018 until the close of business on the second scheduled trading day immediately preceding February 1, 2019, holders mayconvert their Notes at any time. Upon conversion, holders will receive cash up to the principal amount of the Notes and, with respect to any excess conversionvalue, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our option. The conversion rate for the Notes isinitially 40.2945 shares of common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $24.82 per shareof our common stock. The conversion rate will be subject to adjustment for some events, but will not be adjusted for any accrued and unpaid interest.Additionally, during any calendar quarter commencing after the calendar quarter ending June 30, 2013, the holders have the right to convert when our stockprice closes at or above 130% of the conversion price then applicable (the "Consecutive Sales Price") during a period of at least 20 (whether or not consecutive)out of the last 30 consecutive trading days of any given quarter. During the three months ended December 31, 2013, the requirements with respect to theConsecutive Sale Price were met and, as a result, the Notes are redeemable until March 31, 2014. The future convertibility and resulting balance sheetclassification of the Notes will be monitored on a quarterly basis. In the event such requirements are not met in a given quarter, the Notes would be reclassifiedas a long-term liability. See Note 8, Debt, to our consolidated financial statements included herein for additional details.59Table of ContentsRoyalty Interests Assignment AgreementOn March 23, 2007, we entered into the Amended and Restated Royalty Interests Assignment Agreement with Paul Capital, pursuant to which weassigned to Paul Capital the right to receive up to approximately 20% of our royalty payments from DepoCyt(e) and the no-longer marketed DepoDur. Theoriginal agreement was entered into prior to the acquisition by the Predecessor in order to monetize certain royalty payments from DepoCyt(e) and DepoDur. Inconnection with the Acquisition, the original agreement with Paul Capital was amended and restated and the responsibility to pay the royalty interest in productsales of DepoCyt(e) and DepoDur was transferred to us and we were required to make payments to Paul Capital upon the occurrence of certain events. Tosecure our obligations to Paul Capital, we granted Paul Capital a security interest in collateral which includes the royalty payments we are entitled to receivewith respect to sales of DepoCyt(e) and DepoDur, as well as to bank accounts to which such payments are deposited. Under our arrangement with PaulCapital, upon the occurrence of certain events, including if we experience a change of control, undergo certain bankruptcy events of us or our subsidiary,transfer any or substantially all of our rights in DepoCyt(e) and/or DepoDur, transfer all or substantially all of our assets, breach certain of the covenants,representations or warranties under the Amended and Restated Royalty Interests Assignment Agreement, or sales of DepoCyt(e) and/or DepoDur are suspendeddue to an injunction or if we elect to suspend sales of DepoCyt(e) and/or DepoDur as a result of a lawsuit filed by certain third parties, Paul Capital mayrequire us to repurchase the rights we assigned to it at a cash price equal to (a) 50% of all cumulative payments made by us to Paul Capital under the Amendedand Restated Royalty Interests Assignment Agreement during the preceding 24 months, multiplied by (b) the number of days from the date of Paul Capital'sexercise of such option until December 31, 2014, divided by 365. Under the terms of the Amended and Restated Royalty Interests Assignment Agreement, ourinitial public offering did not constitute a change of control.Future Capital RequirementsWe believe that our existing cash and cash equivalents and revenue from product sales will be sufficient to enable us to fund our operating expenses,capital expenditure requirements and service our indebtedness for at least the next 12 months. However, the holders of the Notes have the ability to elect toconvert the Notes at any time during the quarter ended March 31, 2014. We do not believe such action will be taken since the market price of the Notes iscurrently above the estimated conversion value, and in the event of conversion, holders would forgo all future interest payments and the possibility of furtherstock price appreciation. In the event conversion of the Notes did occur, we may not have enough cash on hand to pay the holders the principal plus theconversion premium and may need to raise additional capital or refinance the Notes, although there is no assurance we would be able to do so on acceptableterms or at all.We may require additional debt or equity financing to meet our working capital requirements. Our need for additional external sources of funds willdepend significantly on the level and timing of our sales of EXPAREL. We expect to continue to incur substantial additional operating losses as wecommercialize EXPAREL and develop and seek regulatory approval for our other product candidates. We may also need to invest significant funds to expandour manufacturing capacity for EXPAREL. In addition, we expect to incur additional expenses to add operational, financial and information systems andpersonnel, including personnel to support our planned product commercialization efforts.Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:•our ability to successfully commercialize EXPAREL;•the costs of our commercialization activities for EXPAREL;•the cost and timing of expanding our manufacturing facilities and purchasing manufacturing and other capital equipment for EXPAREL andour other product candidates;•the costs of performing additional clinical trials for EXPAREL, including the pediatric trials required by the FDA as a condition of approvaland the pivotal nerve block trials;•the scope, progress, results and costs of development for additional indications for EXPAREL and for our other product candidates;•the cost, timing and outcome of regulatory reviews of our other product candidates;•the extent to which we acquire or invest in products, businesses and technologies;•the extent to which we choose to establish collaboration, co-promotion, distribution or other similar agreements for our product candidates;and60Table of Contents•the costs of preparing, submitting and prosecuting patent applications and maintaining, enforcing and defending intellectual property claims.To the extent that our capital resources are insufficient to meet our future operating and capital requirements, we will need to finance our cash needsthrough public or private equity offerings, debt financings, corporate collaboration and licensing arrangements or other financing alternatives. The covenantsunder the Amended and Restated Royalty Interests Assignment Agreement may limit our ability to obtain additional debt financing. We have no committedexternal sources of funds. Additional equity or debt financing or corporate collaboration and licensing arrangements may not be available on acceptable terms,if at all.If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, would result inincreased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such asincurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, suchas liquidation and other preferences that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensingarrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grantlicenses on terms that may not be favorable to us.Contractual ObligationsThe table below presents a summary of our contractual obligations as of December 31, 2013 (in thousands): Payments due by periodContractual Obligations (1)Total Less than oneyear 1-3 Years 3-5 Years More than 5yearsSenior convertible notes - principal (2)$120,000 $— $— $— $120,000Senior convertible notes - interest19,825 3,900 7,800 7,800 325Lease obligations (3)33,679 4,765 10,108 10,089 8,717Total$173,504 $8,665 $17,908 $17,889 $129,042(1) This table does not include potential future milestone payments to Skyepharma which could be up to an aggregate of $52.0 million if certain milestones pertaining to net salesof EXPAREL are met. This contingency is described further in Note 6, Goodwill and Intangible Assets, of our consolidated financial statements included herein for additionaldetails.(2) The amounts displayed in the table above represent management's best estimate of timing with respect to the future convertibility of these instruments. See Note 8, Debt, ofour consolidated financial statements included herein for additional details. Additionally, it excludes any conversion premium on the Notes, which may be settled in cash or stock atthe Company's discretion. If the Notes were converted at December 31, 2013, it would result in an approximate premium of 2.8 million shares or $158 million of cash.(3) The amounts consist of operating leases for our corporate headquarters in Parsippany, New Jersey and manufacturing, research and warehouse space in San Diego,California.Off-Balance Sheet ArrangementsWe had no material off-balance sheet arrangements as of December 31, 2013.Recent Accounting PronouncementsSee Note 2 to the Notes to Consolidated Financial Statements in Item 15 below for discussion of recent accounting pronouncements.Item 7A. Quantitative and Qualitative Disclosures about Market RiskThe primary objective of our cash investment activities is to preserve principal while at the same time maximizing the income that we receive from ourinvestments without significantly increasing risk. Some of the securities that we invest in may be subject to market risk. This means that a change inprevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interestrate at the then-prevailing rate and the interest rate later rises, we expect the fair value of our investment will decline. A hypothetical 100 basis point increase ininterest rates would have reduced the fair value of our available-for-sale securities at December 31, 2013 by $0.1 million. To minimize this risk, we maintainour portfolio of cash equivalents and marketable securities in a variety of securities, including commercial paper, government and non-government debtsecurities, and/or money market funds that invest in such securities. At December 31, 2013, all cash, cash equivalents and available for sale securities maturewithin one year. 61Table of ContentsMost of our transactions are conducted in U.S. dollars. We do have certain agreements with commercial partners located outside the United States,which have transactions conducted in Euros. As of December 31, 2013, we had approximately $1.2 million in receivables from customers denominated inEuros. A hypothetical 10% decrease in the value of the U.S. dollar relative to the Euro would have decreased our revenue by $0.2 million for the quarterended December 31, 2013. Our Notes carry a fixed interest rate and, thus, we are not subject to interest rate risk with respect to the Notes.62Table of ContentsItem 8. Financial Statements and Supplementary DataOur consolidated financial statements required by this item, together with the report of our independent registered public accounting firm, appear onpages F-1 through F-30 of this Annual Report on Form 10-K.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresWe maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designedto ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, andreported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management,including our President, Chief Executive Officer and Chairman and Senior Vice President and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.Based on their evaluation as of December 31, 2013, our President, Chief Executive Officer and Chairman and Senior Vice President and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective as of December 31, 2013.Management's Report on Internal Control over Financial ReportingBased upon the results of the evaluation, our management concluded that our internal control over financial reporting was effective as of December 31,2013. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Ourmanagement is responsible for establishing and maintaining adequate "internal control over financial reporting," as such term is defined in Exchange ActRules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our President, Chief Executive Officer andChairman and Senior Vice President and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control overfinancial reporting as of December 31, 2013, based on the criteria established in Internal Control—Integrated Framework (1992 framework) issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).The effectiveness of our internal control over financial reporting as of December 31, 2013 was audited by CohnReznick LLP, our independent registeredpublic accounting firm, as stated in their report appearing below, which expressed an unqualified opinion on the effectiveness of our internal control overfinancial reporting as of December 31, 2013.Changes in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2013, that materiallyaffected, or are reasonably likely to materially affect, our internal control over financial reporting.63Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and StockholdersPacira Pharmaceuticals, Inc. We have audited Pacira Pharmaceuticals, Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2013, based on criteriaestablished in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Pacira Pharmaceuticals, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Ourresponsibility is to express an opinion on the effectiveness of Pacira Pharmaceuticals, Inc.'s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, assessingthe risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk andperforming such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States ofAmerica, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'sassets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. In our opinion, Pacira Pharmaceuticals, Inc. has maintained, in all material respects, effective internal control over financial reporting as of December 31,2013 based on the COSO criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financialstatements of Pacira Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2013 and 2012, and for each of the three years in the period endedDecember 31, 2013 and our report dated February 25, 2014, which included an explanatory paragraph with respect to the Company's convertible senior notes,expressed an unqualified opinion thereon./s/ CohnReznick LLPRoseland, New JerseyFebruary 25, 201464Table of ContentsItem 9B. Other InformationNone.PART IIIITEM 10. Directors, Executive Officers and Corporate GovernanceInformation required by this item will be included in the proxy statement for our 2014 annual stockholders' meeting and is incorporated by reference intothis report.ITEM 11. Executive CompensationInformation required by this item will be included in the proxy statement for our 2014 annual stockholders' meeting and is incorporated by reference intothis report.ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders MattersInformation required by this item will be included in the proxy statement for our 2014 annual stockholders' meeting and is incorporated by reference intothis report.ITEM 13. Certain Relationships and Related Transactions, and Director IndependenceInformation required by this item will be included in the proxy statement for our 2014 annual stockholders' meeting and is incorporated by reference intothis report.ITEM 14. Principal Accountant Fees and ServicesInformation required by this item will be included in the proxy statement for our 2014 annual stockholders' meeting and is incorporated by reference intothis report.PART IVItem 15. Exhibits and Financial Statement Schedules(a)Documents filed as part of Form 10-K.(1)Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Loss Consolidated Statements of Stockholders' Equity (Deficit) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements(2)SchedulesAll financial statement schedules have been omitted because they are not required, are not applicable or the information is included in the FinancialStatements or Notes thereto.(3)ExhibitsThe Exhibits listed in the Exhibit Index are filed as a part of this Form 10-K.65Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. PACIRA PHARMACEUTICALS, INC.Date:February 25, 2014By: /s/ DAVID STACKDavid Stack President, Chief Executive Officer and ChairmanPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.Signature Title Date/s/ DAVID STACK Director, President, Chief Executive Officer and Chairman (Principal Executive Officer) February 25, 2014David Stack /s/ JAMES SCIBETTA Senior Vice President and Chief Financial Officer (Principal Financial Officer) February 25, 2014James Scibetta /s/ LAUREN RIKER Executive Director, Finance (Principal Accounting Officer) February 25, 2014Lauren Riker /s/ LAURA BREGE Director February 25, 2014Laura Brege /s/ JOHN LONGENECKER Director February 25, 2014John Longenecker /s/ GARY PACE Director February 25, 2014Gary Pace /s/ ANDREAS WICKI Director February 25, 2014Andreas Wicki /s/ DENNIS WINGER Director February 25, 2014Dennis Winger /s/ MARK KRONENFELD Director February 25, 2014Mark Kronenfeld /s/ PAUL HASTINGS Lead Director February 25, 2014Paul Hastings 66Table of ContentsPacira Pharmaceuticals, Inc.Index to Consolidated Financial StatementsReport of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of December 31, 2013 and 2012F-3Consolidated Statements of Operations for the years ended December 31, 2013, 2012, and 2011F-4Consolidated Statements of Comprehensive Loss for the years ended December 31, 2013, 2012, and 2011F-5Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2013, 2012, and 2011F-6Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011F-7Notes to Consolidated Financial StatementsF-8F-1Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and StockholdersPacira Pharmaceuticals, Inc. We have audited the accompanying consolidated balance sheets of Pacira Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2013 and 2012,and the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit) and cash flows for each of the three years in the periodended December 31, 2013. Pacira Pharmaceuticals, Inc.'s management is responsible for these consolidated financial statements. Our responsibility is toexpress an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PaciraPharmaceuticals, Inc. and Subsidiaries as of December 31, 2013 and 2012, and their results of operations and cash flows for each of the three years in theperiod ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. As discussed in Notes 2 and 8 to the consolidated financial statements, based on certain conditions that were met during the three months endedDecember 31, 2013, holders of the Company’s convertible senior notes can convert such notes at any time during the quarter ending March 31, 2014. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PaciraPharmaceuticals, Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2013 based on criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February25, 2014, expressed an unqualified opinion thereon./s/ CohnReznick LLPRoseland, New JerseyFebruary 25, 2014F-2Table of ContentsPacira Pharmaceuticals, Inc.Consolidated Balance Sheets(In thousands, except share and per share amounts) December 31, 2013 2012ASSETS Current assets: Cash and cash equivalents$12,515 $10,126Restricted cash1,633 1,523Short-term investments59,637 30,924Accounts receivable, net14,590 4,352Inventories15,557 12,077Prepaid expenses and other current assets2,819 1,920Total current assets106,751 60,922Fixed assets, net48,182 39,116Goodwill10,328 8,297Intangibles, net1,157 3,208Other assets3,402 511Total assets$169,820 $112,054LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable$3,069 $2,569Accrued expenses17,885 9,792Convertible senior notes98,961 —Current portion of royalty interest obligation1,020 823Current portion of deferred revenue1,008 972Total current liabilities121,943 14,156Long-term debt— 25,191Royalty interest obligation226 857Deferred revenue3,212 3,720Other liabilities3,190 2,275Total liabilities128,571 46,199Commitments and contingencies (Note 18) Stockholders' equity: Preferred stock, par value $0.001; 5,000,000 shares authorized, none issued and outstanding atDecember 31, 2013 and 2012— —Common stock, par value $0.001 and 250,000,000 shares authorized; 33,636,442 shares issuedand outstanding at December 31, 2013; 32,624,049 shares issued and 32,622,984 sharesoutstanding at December 31, 201234 33Additional paid-in capital337,639 298,317Accumulated deficit(296,429) (232,520)Accumulated other comprehensive income5 27Treasury stock at cost, none at December 31, 2013 and 1,065 shares at December 31, 2012— (2)Total stockholders' equity41,249 65,855Total liabilities and stockholders' equity$169,820 $112,054See accompanying notes to consolidated financial statementsF-3Table of ContentsPacira Pharmaceuticals, Inc.Consolidated Statements of Operations(In thousands, except share and per share amounts) Year Ended December 31, 2013 2012 2011Revenues: Net product sales$81,956 $18,191 $6,895Collaborative licensing and development revenue972 18,390 5,074Royalty revenue2,623 2,503 3,720Total revenues85,551 39,084 15,689Operating expenses: Cost of revenues54,772 32,139 16,739Research and development21,560 9,937 14,873Selling, general and administrative62,508 46,306 20,159Impairment of long-lived assets— — 3,019Total operating expenses138,840 88,382 54,790Loss from operations(53,289) (49,298) (39,101)Other (expense) income: Interest income259 275 255Interest expense(7,253) (1,807) (4,780)Loss on early extinguishment of debt(3,398) (1,062) —Royalty interest obligation(623) (278) 227Other, net(47) (111) 71Total other expense, net(11,062) (2,983) (4,227)Loss before income taxes(64,351) (52,281) (43,328) Income tax benefit442 — —Net loss$(63,909) $(52,281) $(43,328)Net loss per share: Basic and diluted net loss per common share$(1.93) $(1.72) $(2.64)Weighted average common shares outstanding: Basic and diluted33,181,895 30,331,965 16,437,464See accompanying notes to consolidated financial statementsF-4Table of ContentsPacira Pharmaceuticals, Inc.Consolidated Statements of Comprehensive Loss(In thousands) Year Ended December 31, 2013 2012 2011Net loss$(63,909) $(52,281) $(43,328)Other comprehensive income: Net unrealized gain (loss) on investments(22) 12 15Total other comprehensive income (loss)(22) 12 15Comprehensive loss$(63,931) $(52,269) $(43,313)See accompanying notes to consolidated financial statementsF-5Table of ContentsPacira Pharmaceuticals, Inc.Consolidated Statements of Stockholders' Equity (Deficit)Year Ended December 31, 2013, 2012, and 2011(In thousands) Preferred Stock Preferred Stock Common Stock Common Stock AdditionalPaid-InCapital AccumulatedDeficit TreasuryStock AccumulatedOtherComprehensiveIncome (Loss) Shares Amount Shares Amount TotalBalances at December 31, 20106,322 $6 575 $1 $88,523 $(136,911) $(2) $— $(48,383) Exercise of stock options— — 67 — 135 — — — 135 Share-based compensation— — — — 2,493 — — — 2,493 Initial public offering, net ofissuancecosts— — 6,000 6 37,103 — — — 37,109 Follow-on public offering, net ofissuance costs— — 8,050 8 48,998 — — — 49,006 Conversion of preferred stock(6,322) (6) 6,322 6 — — — — — Conversion of 2009 ConvertibleNotes and accrued interest— — 872 1 11,717 — — — 11,718 Conversion of 2009 SecuredNotes and accrued interest— — 928 1 12,473 — — — 12,474 Conversion of 2010 SecuredNotes and accrued interest— — 1,157 1 15,548 — — — 15,549 Conversion of 2010 ConvertibleNotes and accrued interest— — 1,071 1 7,499 — — — 7,500 Conversion of HBM SecuredNotes and accrued interest and early prepayment penalty— — 297 — 3,981 — — — 3,981 Unrealized gain on short-terminvestments— — — — — — — 15 15 Net loss— — — — — (43,328) — — (43,328)Balances at December 31, 2011— — 25,339 25 228,470 (180,239) (2) 15 48,269 Exercise of stock options— — 279 1 769 — — — 770 Exercise of warrants— — 105 — 100 — — — 100 Share-based compensation— — — — 4,776 — — — 4,776 Unrealized gain on short-terminvestments— — — — — — — 12 12 Follow-on public offering, net ofissuance costs— — 6,900 7 62,848 — — — 62,855 Debt discount on issuance ofwarrants— — — — 1,354 — — — 1,354 Net loss— — — — — (52,281) — — (52,281)Balances at December 31, 2012— — 32,623 33 298,317 (232,520) (2) 27 65,855 Exercise of stock options— — 741 1 3,855 — — — 3,856 Cashless exercise of warrants— — 271 — — — — — — Share-based compensation— — — — 11,513 — — — 11,513 Unrealized loss on short-terminvestments— — — — — — — (22) (22) Equity component of convertiblesenior notes, net of issuance costs— — — — 23,956 — — — 23,956 Issuance of common stock fromtreasury— — 1 — (2) — 2 — — Net loss— — — — — (63,909) — — (63,909)Balances at December 31, 2013— $— 33,636 $34 $337,639 $(296,429) $— $5 $41,249See accompanying notes to consolidated financial statementsF-6Table of ContentsPacira Pharmaceuticals, Inc.Consolidated Statements of Cash Flows(In thousands) Year Ended December 31, 2013 2012 2011Operating activities: Net loss$(63,909) $(52,281) $(43,328)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization5,747 5,648 4,314Amortization of unfavorable lease obligation and debt issuance costs459 (239) (85)Amortization of debt discount3,959 831 1,644Loss on disposal of fixed assets32 1 273Loss on early extinguishment of debt3,398 1,062 —Impairment of long-lived assets— — 3,019Stock-based compensation11,513 4,776 2,493Changes in operating assets and liabilities: Restricted cash(110) (224) 14Accounts receivable, net(10,238) (2,239) (922)Inventories(3,480) (10,832) 360Prepaid expenses and other assets(972) (59) (608)Accounts payable and accrued expenses10,244 1,386 2,549Royalty interest obligation(434) (1,076) (1,815)Other liabilities1,047 (106) 27Deferred revenue(472) (16,778) 1,065Net cash used in operating activities(43,216) (70,130) (31,000)Investing activities: Purchase of fixed assets(12,794) (18,257) (6,167)Proceeds from sales of fixed assets— 1 14Purchases of short-term investments(114,299) (54,047) (52,619)Sale of short-term investments85,564 53,120 22,649Payment of contingent consideration(2,031) (10,339) —Net cash used in investing activities(43,560) (29,522) (36,123)Financing activities: Proceeds from exercise of stock options and warrants3,856 870 136Proceeds from borrowings on long-term debt— 27,500 —Proceeds from initial public offering, net— — 38,016Proceeds from offering, net— 62,855 49,006Proceeds from convertible senior notes120,000 — —Repayment of debt(27,500) (26,250) —Payment of debt issuance and financing costs(7,191) (1,365) —Net cash provided by financing activities89,165 63,610 87,158Net increase (decrease) in cash and cash equivalents2,389 (36,042) 20,035Cash and cash equivalents, beginning of year10,126 46,168 26,133Cash and cash equivalents, end of year$12,515 $10,126 $46,168Supplemental cash flow information Cash paid for interest, including royalty interest obligation$3,500 $4,229 $4,739Initial public offering costs paid in 2010$— $— $907Non cash investing and financing activities: Equity component of convertible senior notes$24,936 $— $—Value of warrants issued with debt$— $1,354 $—Conversion of notes to common stock$— $— $51,222Conversion of preferred stock to common stock$— $— $6See accompanying notes to consolidated financial statementsF-7Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial StatementsNOTE 1—BUSINESSPacira Pharmaceuticals, Inc. and its subsidiaries (collectively, the "Company" or "Pacira") is a specialty pharmaceutical company focused on thedevelopment, commercialization and manufacture of proprietary pharmaceutical products, based on its proprietary DepoFoam® extended release drug deliverytechnology, for use in hospitals and ambulatory surgery centers. The Company's lead product EXPAREL®, which consists of bupivacaine encapsulated inDepoFoam, was approved by the United States Food and Drug Administration, or FDA, on October 28, 2011 and launched commercially in April 2012.DepoFoam is also the basis for the Company's other FDA-approved product, DepoCyt(e), which the Company manufactures for its commercial partners.Pacira Pharmaceuticals, Inc. is the holding company for its California operating subsidiary of the same name, also referred to as PPI-California, whichwas acquired from SkyePharma Holding, Inc., or Skyepharma, in March 2007, referred to herein as the Acquisition.Pacira is subject to risks common to companies in similar industries and stages of development, including, but not limited to, competition from largercompanies, reliance on revenue from few customers and products, reliance on single manufacturing sites, new technological innovations, dependence on keypersonnel, reliance on third-party service providers and sole source suppliers, protection of proprietary technology and compliance with governmentregulations.NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of Presentation and Principles of ConsolidationThe consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America,or GAAP, and in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC. The accounts of wholly owned subsidiariesare included in the consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. Certainreclassifications were made to conform to the current presentation.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts ofassets and liabilities, including disclosure of contingent assets and contingent liabilities, at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Estimates are used for, among other things, the valuation of assets acquired, impairment of long-livedassets, goodwill, stock-based compensation and valuation of deferred tax assets. The Company's critical accounting policies are those that are both mostimportant to the Company's consolidated financial condition and results of operations and require the most difficult, subjective, or complex judgments on thepart of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Because of theuncertainty of factors surrounding the estimates or judgments used in the preparation of the consolidated financial statements, actual results could differ fromthese estimates.LiquidityManagement believes that the Company's existing cash and cash equivalents, short-term investments and revenue from product sales will be sufficientto enable the Company to meet its planned operating expenses, capital expenditure requirements and service its indebtedness at least through December 31,2014. However, changing circumstances may cause the Company to expend cash significantly faster than currently anticipated, and the Company may needto spend more cash than currently expected because of circumstances beyond its control. The Company expects to continue to incur substantial additionaloperating losses as it continues to commercialize EXPAREL and develops and seeks regulatory approval for its product candidates.On January 23, 2013, the Company completed a private placement of $120.0 million in aggregate principal amount of 3.25% convertible senior notes, orNotes, due 2019. As further discussed in Note 8, Debt, the Company must settle the principal of the Notes in cash upon conversion and it may settle anyconversion premium in either cash or stock at the Company's discretion. Based on certain conditions that were met during the three months endedDecember 31, 2013, the holders can convert their Notes at any time during the quarter ended March 31, 2014 and, therefore, are classified in the consolidatedbalance sheet at December 31, 2013 as a current obligation. The Company does not believe such action will be taken as theF-8market price of the Notes is currently above the estimated conversion value, and in the event of conversion, holders would forgo all future interest paymentsand the possibility of further stock price appreciation. If conversion of the Notes did occur, the Company may not have enough cash to pay the holders theprincipal plus the conversion premium and may need to raise additional capital or refinance the Notes, although there is no assurance that the Company willbe able to do so on acceptable terms or at all. The Company's ability to refinance its indebtedness will depend on the capital markets and its financialcondition at such time.Revenue RecognitionPrincipal sources of revenue include (i) sales of EXPAREL in the United States, or U.S., (ii) sales of DepoCyt(e) in the U.S. and European Union, orE.U., (iii) royalties based on sales by commercial partners of DepoCyt(e), and (iv) license fees, milestone payments and reimbursement for development workfrom third parties. The Company recognizes revenue when there is persuasive evidence that an arrangement exists, title has passed, collection is reasonablyassured and the price is fixed or determinable.Net Product SalesThe Company sells EXPAREL through a drop-ship program under which orders are processed through wholesalers based on orders of the productplaced by end users which include hospitals, ambulatory surgery centers and doctors. EXPAREL is delivered directly to the end user with the wholesaler nevertaking physical possession of the product. The Company records revenue at the time the product is delivered to the end user. The Company also recognizesrevenue from products manufactured and supplied to commercial partners, such as DepoCyt(e) upon shipment. Prior to the shipment of manufacturedproducts, the Company conducts initial product release and stability testing in accordance with current Good Manufacturing Practices.At the time the Company recognizes revenue, it also records certain sales reserves and allowances as a reduction of revenue. These reserves andallowances include a prompt payment reserve, return reserves, volume rebates, chargeback reserve and wholesaler service fee. Due to estimates andassumptions inherent in determining some of the sales reserves, the actual amount of volume rebates, chargebacks and returns may be different fromestimates, at which time the Company would adjust the reserves accordingly.Prompt Payment ReserveThe prompt payment reserve is based upon discounts offered to wholesalers as an incentive to meet certain payment terms. The Company accounts forthese discounts at the time the sale is made and reduces accounts receivable accordingly.Return ReservesThe Company allows customers to return product that is damaged or received in error. In addition, the Company allows for EXPAREL product to bereturned beginning six months prior to, and twelve months following product expiration. As EXPAREL is a recent commercially available product, theCompany is estimating its sales return reserve based on return history from other hospital-based products with similar distribution models, whichmanagement believes is the best estimate of the anticipated product to be returned. The returns reserve is recorded at the time of sale as a reduction to sales andan increase in returns liability.Commercial partners can return the products within contracted specified timeframes if the products do not meet the applicable inspection tests.Historically, returns from commercial partners have not been material.Volume Rebates and Chargeback ReserveVolume rebates and the chargeback reserve are based upon contracted discounts and promotional offers the Company provides to certain end users,which are members of group purchasing organizations. The volume rebates and chargeback reserve are recorded as a reduction to sales and a customerpayable and reduction to receivables, respectively.Wholesaler Service FeeThe Company's customers include major and regional wholesalers with whom the Company has contracted a fee for service based on a percentage ofsales. This fee for service is recorded as a reduction to gross sales and a liability is established at the time the sale is recorded based on the contractedpercentage.F-9Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (Continued)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Royalty RevenueThe Company recognizes revenue from royalties based on sales of its products by commercial partners. Royalties are recognized as earned in accordancewith contract terms when they can be estimated based on historical product sales, royalty receipts and other relevant information, and collection is reasonablyassured.Collaborative Licensing and Development RevenueThe Company recognizes revenue from reimbursements received in connection with feasibility studies and development work for third parties whodesire to utilize its DepoFoam extended release drug delivery technology for their products when the Company's contractual services are performed, providedcollection is reasonably assured. The Company's principal costs under these agreements include its personnel conducting research and development andallocated overhead, as well as research and development performed by outside contractors or consultants.The Company recognizes revenues from non-refundable up-front license fees received ratably over the performance period using the estimateddevelopment period in development agreements and the contract period or longest patent life in supply and distribution agreements. If the estimated performanceperiod is subsequently modified, the Company will modify the period over which the up-front license fee is recognized accordingly on a prospective basis.Upon notification of a termination of a collaboration agreement, any remaining non-refundable license fees received by the Company, which had been deferred,are recognized over the remaining contractual term. If the termination is immediate and no additional services are to be performed, the deferred revenue isgenerally recognized in full. All such recognized revenues are included in collaborative licensing and development revenue in the Company's consolidatedstatements of operations.The Company recognizes revenue from milestone payments received under collaboration agreements when earned, provided that the milestone event issubstantive, its achievability was not reasonably assured at the inception of the agreement, the Company has no further performance obligations relating to theevent and collection is reasonably assured. If these criteria are not met, the Company recognizes milestone payments ratably over the remaining period of theCompany's performance obligations under the collaboration agreement. All such recognized revenues are included in collaborative licensing and developmentrevenue in the Company's consolidated statements of operations.Concentration of Major CustomersThe Company's customers are its major and regional wholesalers and commercial and collaborative and licensing partners. The Company sellsEXPAREL through a drop-ship program under which orders are processed through wholesalers (including AmerisourceBergen Health Corporation, CardinalHealth, Inc., and McKesson Drug Company), but shipments of the product are sent directly to individual accounts, such as hospitals, ambulatory surgerycenters and doctors. The table below includes the percentage of revenue comprised by the three largest customers (i.e., wholesalers or commercial partners) ineach year presented: Year Ended December 31, 2013 2012 2011Largest customer33% 30% 43%Second largest customer28% 14% 23%Third largest customer18% 11% 19% 79% 55% 85%Sales to customers outside the U.S. accounted for 5%, 23% and 64% of the Company's revenue for the years ended December 31, 2013, 2012 and2011, respectively.Research and Development ExpensesResearch and development expenses consist of costs associated with products being developed internally, and include related personnel expenses,laboratory supplies, active pharmaceutical ingredients, manufacturing supplies, facilities costs, preclinical and clinical trial costs, and other outside servicefees. The Company expenses research and development costs as incurred. A significant portion of the development activities are outsourced to third parties,including contract research organizations. In such cases, the Company may be required to estimate related service fees to be accrued.F-10Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (Continued)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Cash and Cash EquivalentsAll highly-liquid investments with maturities of 90 days or less when purchased are considered cash equivalents.Restricted CashAs further discussed in Note 8, Debt, the Company has entered into a financing agreement with Royalty Securitization Trust I, or RST, for the sale of aroyalty interest in its DepoCyt(e) and DepoDur product revenue and royalties. The royalty interest agreement pertains only to DepoCyt(e) and the Company'spreviously-marketed product, DepoDur, and does not include revenue related to EXPAREL or any other product candidates. As part of this financingagreement, the Company and RST maintain a lockbox, where all DepoCyt(e) and DepoDur product revenue and royalties are received. The Company has nominimum payment obligations under this agreement. Commencing on April 1 of every year, the first $2.5 million received in the lockbox is restricted and isused to make quarterly payments due to RST, if any, under the agreement during the subsequent 12 month period. On March 31 of the subsequent year, thebalance of cash in the lockbox, if any, is remitted to the Company. The RST agreement terminates on December 31, 2014.Short-Term InvestmentsThe Company determines the appropriate classification of its investments at the time of purchase and reevaluates such determination at each balancesheet date. The Company's investment policy sets minimum credit quality criteria and maximum maturity limits on its investments to provide for preservationof capital, liquidity and a reasonable rate of return. Available-for-sale securities are recorded at fair value, based on current market valuations. Unrealizedholding gains and losses on available-for-sale securities are excluded from net loss and are reported as a separate component of other comprehensive loss untilrealized. Realized gains and losses are included in non-operating other income (expense) on the consolidated statements of operations and are derived using thespecific identification method for determining the cost of the securities sold.InventoriesInventories consist of finished goods held for sale and distribution, raw materials and work in process. Inventories are stated at the lower of cost, whichincludes amounts related to material, labor, and overhead; or market (net realizable) value and is determined using the first-in, first-out ("FIFO") method. TheCompany periodically reviews its inventory to identify obsolete, slow-moving, or otherwise unsalable inventories, and establishes allowances for situations inwhich the cost of the inventory is not expected to be recovered. Overhead costs associated with excess manufacturing capacity are charged to cost of revenue asincurred.Fixed AssetsFixed assets are recorded at cost, net of accumulated depreciation and amortization. The Company reviews its property, plant, and equipment assets forimpairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.Depreciation of fixed assets is provided over their estimated useful lives on a straight-line basis. Leasehold improvements are amortized on a straight-linebasis over the shorter of their estimated useful lives or the related remaining lease terms. Useful lives by asset category are as follows:Asset Category Useful LivesComputer equipment and software 1 to 3 yearsOffice furniture and equipment 5 yearsManufacturing and laboratory equipment 5 to 10 yearsGoodwill and Intangible AssetsIntangible assets are recorded at cost, net of accumulated amortization. Amortization of intangible assets is provided over their estimated useful lives on astraight-line basis. The Company evaluates the recoverability of intangible assets periodically and takes into account events and circumstances which indicatethat impairment exists. Goodwill represents the excess of purchase price over fair value acquired in a business combination and is not amortized, but subjectto impairment at least annually or when a triggering event occurs that could indicate a potential impairment.F-11Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (Continued)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Impairment of Long-Lived AssetsManagement reviews long-lived assets, including fixed assets, for impairment whenever events or changes in circumstances indicate the carryingamount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset tofuture undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized ismeasured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.Foreign CurrenciesThe Company receives payment from certain commercial partners relating to royalties on DepoCyte in Euros. Realized gains and losses from foreigncurrency transactions are reflected in the consolidated statements of operations and were not significant in any period. All foreign currency receivables andpayables are measured at the applicable exchange rate at the end of the reporting period.Income TaxesThe Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimatedfuture tax consequences attributable to basis differences between the financial statement carrying amounts of existing assets and liabilities and their respectivetax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to berealized. As of December 31, 2013 and 2012, all deferred tax assets were fully offset by a valuation allowance.In February 2013, the Company received $0.4 million from the sale of unused net operating losses through the State of New Jersey’s EconomicDevelopment Authority Technology Business Tax Certificate Transfer Program. As a result, the Company recorded an income tax benefit by reversing thevaluation allowance for the related net deferred tax assets. The Company continues to maintain a full valuation allowance on its remaining net deferred taxassets because there is significant doubt regarding the Company’s ability to utilize such net deferred tax assets.The Company accrues interest and penalties, if any, on underpayment of income taxes related to unrecognized tax benefits as a component of income taxexpense in its consolidated statements of operations.Per Share DataBasic net loss per share is computed by dividing net loss available (attributable) to common stockholders by the weighted average number of shares ofcommon stock outstanding during the period.Diluted net income (loss) per share is calculated by dividing net income (loss) available (attributable) to common stockholders as adjusted for the effectof dilutive securities, if any, by the weighted average number of common stock and dilutive common stock outstanding during the period. Potential commonshares include the shares of common stock issuable upon the exercise of outstanding stock options and warrants (using the treasury stock method) as well asany common shares arising from the conversion of the Company's senior convertible notes. Potential common shares in the diluted net loss per sharecomputation are excluded to the extent that they would be anti-dilutive. No potentially dilutive securities are included in the computation of any diluted pershare amounts as the Company reported a net loss for all periods presented.Stock-Based CompensationThe Company's stock-based compensation programs include grants of stock options to employees, consultants, and non-employee directors. Theexpense associated with these programs is recognized in the Company's consolidated statements of operations based on their fair values as they are earnedunder the applicable vesting terms.The valuation of stock options is an inherently subjective process, since market values are generally not available for long-term, non-transferable stockoptions. Accordingly, the Company uses an option pricing model to derive an estimated fair value. In calculating the estimated fair value of stock optionsgranted, the Company uses the Black-Scholes option pricing model which requires the consideration of the following variables for purposes of estimating fairvalue:F-12Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (Continued)NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)•Expected term of the option•Expected volatility•Expected dividends•Risk-free interest rateSince its initial public offering, the Company utilizes its available historic volatility data combined with a publicly traded peer group's historic volatilityto determine expected volatility over the expected option term. The Company's limited historical stock option exercise experience does not provide a reasonablebasis upon which to estimate expected term. Accordingly, the Company uses a term based on a simplified method, pursuant to SEC Staff Accounting BulletinNo. 107, Share-based Payment, for "plain vanilla" options. The risk-free interest rate is based on the implied yield on U.S. Department of the Treasury zerocoupon bonds for periods commensurate with the expected term of the options. The dividend yield on the Company's common stock is estimated to be zero asthe Company has not paid any dividends since inception, nor does it have any intention to do so in the foreseeable future. The Company estimates the level ofaward forfeitures expected to occur, and records compensation cost only for those awards that are ultimately expected to vest.Segment ReportingThe Company operates in one reportable segment and, accordingly, no segment disclosures have been presented.NOTE 3—RECENT ACCOUNTING PRONOUNCEMENTSIn July 2013, the Financial Accounting Standards Board, or FASB, issued a new accounting standard which will require the presentation of certainunrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the consolidated balance sheets when a net operating losscarryforward, a similar tax loss, or a tax credit carryforward exists. The new standard requires adoption on a prospective basis in the first quarter of 2015;however, early adoption is permitted. The Company does not anticipate that this adoption will have a significant impact on its financial position, results ofoperations, or cash flows.Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or notsignificant to the consolidated financial statements of the Company.NOTE 4—INVENTORIESThe components of inventories were as follows (in thousands): December 31, 2013 2012Raw materials$5,290 $4,081Work-in-process6,321 5,979Finished goods3,946 2,017Total$15,557 $12,077F-13Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (Continued)NOTE 5—FIXED ASSETSFixed assets, net summarized by major category, consist of the following (in thousands): December 31, 2013 2012Machinery and laboratory equipment$19,570 $12,414Computer equipment and software2,476 1,579Office furniture and equipment441 437Leasehold improvements24,852 6,217Construction in progress13,419 30,072Total60,758 50,719Less accumulated depreciation(12,576) (11,603)Fixed assets, net$48,182 $39,116Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was $3.7 million, $3.6 million and $2.0 million, respectively. During theyears ended December 31, 2013, 2012 and 2011, the Company capitalized interest of $1.1 million, $2.0 million and $0.8 million, respectively. The balanceof construction in progress at December 31, 2013 relates primarily to a new manufacturing line for EXPAREL.During the year ended December 31, 2011, an impairment loss of $1.3 million was recognized due to a decision made during the fourth quarter of 2011to change the automation technology process in the Company's production line to expand EXPAREL capacity resulting in certain software and equipmentpreviously capitalized as construction in progress that were no longer utilizable. Also during 2011, the Company impaired $0.3 million of DepoDur relatedequipment. Refer to Note 6, Goodwill and Intangible Assets, for discussion on the impairment. These impairment losses are reflected in impairment of long-lived assets in the Company's consolidated statements of operations for the year ended December 31, 2011.NOTE 6—GOODWILL AND INTANGIBLE ASSETSThe Company's goodwill arose from the triggering in April 2012 of a contingent milestone payment to Skyepharma in connection with the Acquisition.The Acquisition was accounted for under Statement of Financial Accounting Standards 141, Accounting for Business Combinations, which was theeffective GAAP at the Acquisition date. In connection with the Acquisition, the Company agreed to certain earn-out payments based on a percentage of net salesof EXPAREL collected and certain other yet-to-be-developed products, as well as milestone payments for EXPAREL as follows:(a)$10.0 million upon first commercial sale in the United States;(b)$4.0 million upon first commercial sale in a major EU country (United Kingdom, France, Germany, Italy and Spain);(c)$8.0 million when annual net sales collected reach $100.0 million;(d)$8.0 million when annual net sales collected reach $250.0 million; and(e)$32.0 million when annual net sales collected reach $500.0 million.The first contingency was resolved in April 2012 resulting in a $10.0 million payment to Skyepharma. The Company recorded this payment net of the$2.0 million contingent consideration liability recognized at the time of the Acquisition resulting in $8.0 million recorded as goodwill. Any remaining earn-outpayments will also be treated as additional cost of the Acquisition and, therefore, recorded as goodwill if and when each contingency is resolved.F-14The change in carrying value of goodwill is summarized as follows (in thousands):Balance at December 31, 2011$—Milestone payment to Skyepharma, net of contingent consideration liability7,958Percentage payments on net sales of EXPAREL collected339Balance at December 31, 20128,297Percentage payments on net sales of EXPAREL collected2,031Balance at December 31, 2013$10,328Intangible assets, net, consist of core technology, developed technology and trademarks and trade names acquired in the Acquisition as follows (inthousands):December 31, 2013GrossCarrying Value AccumulatedAmortization IntangibleAssets, Net EstimatedUsefulLifeAmortizable intangible assets: Core technology$2,900 $(2,175) $725 9 YearsDeveloped technology11,700 (11,282) 418 7 YearsTrademarks and trade names400 (386) 14 7 YearsTotal intangible assets$15,000 $(13,843) $1,157 December 31, 2012GrossCarrying Value AccumulatedAmortization IntangibleAssets, Net EstimatedUsefulLifeAmortizable intangible assets: Core technology$2,900 $(1,853) $1,047 9 yearsDeveloped technology11,700 (9,610) 2,090 7 yearsTrademarks and trade names400 (329) 71 7 yearsTotal intangible assets$15,000 $(11,792) $3,208 Annual amortization expense for intangibles for the years ended December 31, 2013, 2012 and 2011 was $2.1 million, $2.1 million and $2.3 million,respectively.In December 2011, the Company was notified of the intent of its commercial partner, EKR Therapeutics, Inc., or EKR, to exit the DepoDur market. Asa result, the Company recorded an impairment loss of $1.4 million representing the entire net intangible value of the DepoDur rights. In making thedetermination to impair the intangible asset, the Company also considered its inability to re-sublicense the product due to minimal supply revenue for theproduct both in the U.S. and in Europe as well as DepoDur's complex manufacturing process. Such impairment losses are reflected in impairment of long-lived assets in the Company's consolidated statements of operations for the year ended December 31, 2011.The approximate future amortization expense for intangibles subject to amortization is as follows (in thousands): CoreTechnology DevelopedTechnology Trademarksand Tradenames Total2014$322 $418 $14 $7542015322 — — 322201681 — — 81Total$725 $418 $14 $1,157F-15Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (Continued)NOTE 7—ACCRUED EXPENSESAccrued expenses consist of the following (in thousands): December 31, 2013 2012Compensation and benefits$5,488 $1,635Accrued operating expenses8,001 5,686Accrued royalties1,526 360Accrued interest and end of term fee1,625 1,873Product returns, rebates and other fees1,245 238Total$17,885 $9,792NOTE 8—DEBTThe composition of the Company's debt and financing obligations is as follows (in thousands): December 31, 2013 2012Debt: Convertible senior notes$120,000 $—Long-term debt— 27,500Discount on debt(21,039) (2,309)Total debt, net of discount98,961 25,191Royalty interest obligation1,246 1,680Total debt and financing obligations$100,207 $26,871Senior Convertible NotesOn January 23, 2013, the Company completed a private placement of $120.0 million in aggregate principal amount of 3.25% Notes, and entered intoan indenture, or the Indenture, with Wells Fargo Bank National Association as trustee governing the Notes. The Notes accrue interest at a rate of 3.25% peryear, payable semiannually in arrears on February 1and August 1 of each year, beginning on August 1, 2013. The Notes mature on February 1, 2019.The net proceeds from the offering were $115.3 million, after deducting the initial purchasers’ discounts and commissions and the offering expensespayable by the Company. The net proceeds from the Notes were used by the Company to repay the entire balance of the Oxford Credit Facility with OxfordFinance LLC and for working capital purposes. In connection with such termination, the Company prepaid the remaining principal amount of $27.5 million,$1.7 million end of term fee, $0.8 million early prepayment penalty and $0.2 million of accrued interest. The Company recorded a loss on extinguishment ofdebt of $3.4 million, comprised of the early prepayment penalty, remaining unamortized debt issuance costs and end of term fee.Holders may convert their Notes prior to the close of business on the business day immediately preceding August 1, 2018, only under the followingcircumstances:(i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2013 (and only during such calendar quarter), if the lastreported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period including the last 30 consecutivetrading days of the quarter (ending on the last trading day of the immediately preceding calendar quarter) is greater than 130% of the conversion price thenapplicable (the "Consecutive Sales Price"), on each applicable trading day;F-16(ii) during the five business-day period after any five consecutive trading-day period (the ‘‘measurement period’’) in which the trading price (asdefined in the Indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the lastreported sale price of the Company’s common stock and the conversion rate on each such trading day;(iii) upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of the Company’s assets; or(iv) if the Company calls the Notes for redemption until the close of business on the business day immediately preceding the redemption date.On or after August 1, 2018, until the close of business on the second scheduled trading day immediately preceding February 1, 2019, holders mayconvert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, holders will receive cash up to the principal amount of the Notesand, with respect to any excess conversion value, cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’scommon stock, at the Company’s option. The conversion rate for the Notes is initially 40.2945 shares of common stock per $1,000 principal amount, whichis equivalent to an initial conversion price of approximately $24.82 per share of the Company’s common stock. The conversion rate will be subject toadjustment for some events, but will not be adjusted for any accrued and unpaid interest. The initial conversion price of the Notes represented a premium ofapproximately 32.50% to the closing sale price of $18.73 per share of the Company’s common stock on The NASDAQ Global Select Market on January 16,2013, the date that the Company priced the private offering of the Notes.During the quarter ended December 31, 2013, the requirements with respect to the Consecutive Sales Price were met. As a result, the Notes areclassified as a current obligation and will be convertible until March 31, 2014. As of December 31, 2013, the Notes had a market price of $2,403 per $1,000principal amount, compared to an estimated conversion value of $2,316. Since the market price of the Notes is currently above the estimated conversionvalue, the Company does not anticipate that holders will elect to convert their Notes. Additionally, in the event of conversion, holders would forgo all futureinterest payments, any unpaid accrued interest and the possibility of further stock price appreciation. If conversion requests are received, the settlement of theNotes will be paid pursuant to the terms of the Indenture, which state that the principal must be settled in cash.While the Notes are classified in the Company’s consolidated balance sheet at December 31, 2013 as a current obligation, the future convertibilityand resulting balance sheet classification of this liability will be monitored at each quarterly reporting date and will be analyzed dependent upon market pricesof the Company’s common stock during the prescribed measurement periods. In the event that the holders of the Notes continue to have the election to convertthe Notes at any time during the prescribed measurement period, the Notes will continue to be considered a current obligation and classified as such. In theevent that none of the conditions above are satisfied for the quarter ended March 31, 2014, the Notes would be reclassified as a long-term liability.Prior to February 1, 2017, the Company may not redeem the Notes. On or after February 1, 2017, the Company may redeem for cash all or part ofthe Notes if the last reported sale price (as defined in the Indenture) of the Company’s common stock has been at least 130% of the conversion price then ineffect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending within 5 trading days prior to the date onwhich the Company provides notice of redemption. The redemption price will equal the sum of (i) 100% of the principal amount of the Notes being redeemed,plus (ii) accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date, plus (iii) a “make-whole premium” paymentin cash equal to the sum of the present values of the remaining scheduled payments of interest that would have been made on the Notes to be redeemed hadsuch Notes remained outstanding from the redemption date to the maturity date (excluding interest accrued to, but excluding, the redemption date that isotherwise paid pursuant to the preceding clause (ii)). The present values of the remaining interest payments will be computed using a discount rate equal to2.0%. The Company must make the make-whole premium payments on all Notes called for redemption prior to the maturity date, including Notes convertedafter the date the Company provides the notice of redemption. No sinking fund is provided for the Notes, which means that the Company is not required toredeem or retire the Notes periodically.F-17Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (Continued)NOTE 8—DEBT (Continued)If the Company undergoes a fundamental change as defined in the Indenture, subject to certain conditions, holders of the Notes may require theCompany to repurchase for cash all or part of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plusaccrued and unpaid interest to, but excluding, the fundamental change repurchase date.The Notes are senior unsecured obligations of the Company and will rank senior in right of payment to the Company’s future indebtedness, if any,that is expressly subordinated in right of payment to the Notes and equal in right of payment to the Company’s existing and future unsecured indebtednessthat is not so subordinated. The Notes are effectively junior in right of payment to any secured indebtedness of the Company to the extent of the value of theassets securing such indebtedness and are structurally junior to all existing and future indebtedness and other liabilities (including trade payables) incurred bythe Company’s subsidiaries.The Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the incurrence of other indebtedness,or the issuance or repurchase of securities by the Company. The Indenture contains customary events of default with respect to the Notes, including that uponcertain events of default, 100% of the principal of and accrued and unpaid interest on the Notes will automatically become due and payable.Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account forthe liability and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in amanner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to beincluded in the additional paid-in capital section of stockholders’ equity on the consolidated balance sheet at the issuance date and the value of the equitycomponent would be treated as debt discount for purposes of accounting for the debt component of the Notes. The initial carrying value of the liabilitycomponent of $95.1 million was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carryingvalue of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value ofthe Notes as a whole. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.The Company allocated the total transaction costs of $4.7 million related to the issuance of the Notes to the liability and equity components of theNotes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the 6-year term of the Notes,and transaction costs attributable to the equity component are netted with the equity components in stockholders’ equity.The following table sets forth the total interest expense recognized related to the Notes (in thousands): Year Ended December 31, 2013 2012 2011Contractual interest expense$3,662 $— $—Amortization of debt issuance costs584 — —Amortization of debt discount3,897 — — $8,143 $— $— Effective interest rate7.22% — —Oxford Loan FacilityOn May 2, 2012, the Company entered into a definitive loan and security agreement, or the Loan Agreement, with Oxford Finance LLC, or the Lender,and borrowed the principal amount of $27.5 million, or the Loan Facility, at a fixed rate of 9.75%, with the first principal payment due December 1, 2013.The term loan under the Oxford Loan Facility was repaid and terminated in January 2013 and the Company recorded a loss on extinguishment of debt of $3.4million comprised of the early prepayment penalty and the remaining unamortized debt issuance costs and end of term fee.F-18Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (Continued)NOTE 8—DEBT (Continued)In connection with the Loan Agreement, the Company issued to the Lender warrants that are exercisable for an aggregate of 162,885 shares of itscommon stock at a per share exercise price of $10.97. Each warrant may be exercised on a cashless basis in whole or in part. The value of the warrants wasrecorded as a debt discount and amortized over the term of the loan to interest expense. The fair value of the warrants was determined using the Black-Scholesoption model (using a discount rate of 1.96%, volatility of 69.69%, a dividend yield of 0% and a contractual term of 10 years). The relative fair value of thewarrants totaled $1.4 million.Sale of Royalty InterestsIn 2000, PPI-California and SkyePharma PLC entered into a Royalty Interests Assignment Agreement, or PLC Royalty Agreement, with an affiliate ofPaul Capital Advisors, LLC, or Paul Capital, to raise $30.0 million. Under the PLC Royalty Agreement, Paul Capital had the right to receive a royalty interestin four of SkyePharma's product sales including product sales of, and other payments related to DepoCyt(e) and the no-longer marketed DepoDur. Paymentsbegan for product sales realized on or after January 1, 2003 and continue through December 31, 2014.In connection with the Acquisition, the PLC Royalty Agreement was amended ("Amended and Restated Royalty Interests Assignment Agreement"). Aspart of this amendment the responsibility to pay the royalty interest in product sales of DepoCyt(e) and DepoDur were transferred to the Company and thepayment to Paul Capital in a "Purchase Option Event" of the Company, as described below, was defined. The net present value of royalties expected to berepaid to Paul Capital (the "royalty interest obligation") was valued at $13.0 million.The Company recorded the royalty interest obligation as a liability in the consolidated balance sheets in accordance with ASC 470-10-25, Sales ofFuture Revenues. The Company imputes interest expense associated with this liability using the effective interest rate method. The effective interest rate mayvary during the term of the agreement depending on a number of factors including the actual sales of DepoCyt(e) and DepoDur and a significant estimation,performed quarterly, of certain future cash flows of the Company related to these products during the remaining term of the Royalty Interests AssignmentAgreement which terminates on December 31, 2014. Any adjustment to the estimates is reflected in the Company's consolidated statements of operations asinterest income (expense). In addition, such cash flows are subject to foreign exchange movements related to sales of DepoCyt(e) and DepoDur denominated incurrencies other than U.S. dollars.The PLC Royalty Agreement also includes a provision for a "Purchase Option Event." The events include: (i) any change of control, a direct or indirectconsequence of which is a material abatement of efforts to develop, market or sell any of the products or reformulated products; or (ii) the transfer by theparent of all or substantially all of the parent's consolidated assets; or (iii) the transfer by the Company of all or any part of their respective interests in theproducts or reformulated products, or (iv) bankruptcy or other breach or default under the agreement. In the event a Purchase Option Event occurs, PaulCapital shall have the right, but not the obligation, exercisable within 90 days, to require the Company to repurchase from Paul Capital the Royalty InterestsAssignment, for a repurchase price equal to 50% of the cumulative amount of all payments made during the preceding 24 months (calculated from the date ofthe Purchaser's receipt of the notice from the Company of the Purchase Option Event) multiplied by the number of days from the date of Paul Capital's exerciseof such option until December 31, 2014, divided by 365.The Company has no minimum payment obligations under the PLC Royalty Agreement. However, the repayment of the Paul Capital liability issupported through a jointly controlled lockbox, where all DepoCyt(e) and DepoDur product revenue and royalties are received as discussed in Note 2,Summary of Significant Accounting Policies.NOTE 9—FINANCIAL INSTRUMENTSFair Value MeasurementsFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in anorderly transaction. To increase consistency and comparability in fair value measurements, FASB established a three-level hierarchy, which requires an entityto maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels are:•Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair valuehierarchy gives the highest priority to Level 1 inputs.F-19•Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.•Level 3: Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority toLevel 3 inputs.The fair value of the Company's Notes at December 31, 2013 is calculated utilizing market quotations from an over-the-counter trading market for suchnotes (Level 2). The carrying amount and fair value of the Notes is as follows (in thousands): Carrying Fair Value Measurements UsingFinancial Liabilities Carried at Historical CostValue Level 1 Level 2 Level 3December 31, 2013 Convertible senior notes *$98,961 $— $288,300 $—*The fair value of the Notes was based on the Company's closing stock price of $57.49 per share at December 31, 2013 compared to a conversion price of $24.82 per share,which if converted would result in an approximate conversion premium of 2.8 million shares or $158 million of cash. The maximum conversion premium that can be due on theNotes is 4.8 million shares, which assumes no increases in the conversion rate for certain corporate events.Short-term investments consist of U.S. Treasury securities, investment grade commercial paper, asset-backed securities collateralized by credit cardreceivables and corporate bonds with initial maturities of greater than three months at the date of purchase but less than one year. The net unrealized gains(losses) from the Company's short-term investments are captured in other comprehensive income (loss). At December 31, 2013, all of the Company's short-term investments are classified as available for sale investments and determined to be Level 2 instruments, which are measured at fair value using standardindustry models with observable inputs. At December 31, 2013, the Company had $59.6 million invested in short-term investments which were rated A orbetter by Standard & Poor's and had maturities ranging from 109 to 363 days from date of purchase.The following summarizes the Company's short-term investments at December 31, 2013 and 2012 (in thousands):December 31, 2013Cost GrossUnrealizedGains GrossUnrealizedLosses Fair Value(Level 2)Debt securities: Commercial Paper$17,986 $11 $— $17,997Corporate Bonds30,808 1 (7) 30,802Asset-backed Securities10,838 1 (1) 10,838Total$59,632 $13 $(8) $59,637December 31, 2012Cost GrossUnrealizedGains GrossUnrealizedLosses Fair Value(Level 2)Debt securities: Commercial Paper$15,974 $23 $— $15,997Corporate Bonds8,874 1 (1) 8,874Asset-backed Securities6,049 4 — 6,053Total$30,897 $28 $(1) $30,924Certain assets and liabilities are measured at fair value on a nonrecurring basis including assets and liabilities acquired in a business combination andlong-lived assets, which would be recognized at fair value if deemed to be impaired or if reclassified as assets held for sale. The fair value in these instanceswould be determined using Level 3 inputs. At December 31, 2013, the Company had no financial instruments that were measured using Level 3 inputs.F-20Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (Continued)NOTE 9—FINANCIAL INSTRUMENTS (Continued)Credit RiskFinancial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-terminvestments and accounts receivable. The Company maintains its cash and cash equivalents and short-term investments with high-credit quality financialinstitutions. At times, such amounts may exceed Federally insured limits. The Company performs ongoing credit evaluations of its customers, as warranted,and generally does not require collateral. As of December 31, 2013, three customers accounted for over 10% of the Company's accounts receivable; 31%, 31%and 20%. At December 31, 2012, four customers accounted for over 10% of the Company's accounts receivable; 31%, 27%, 16% and 15%. Revenues areprimarily derived from major wholesalers and pharmaceutical companies that generally have significant cash resources. Allowances for doubtful accountsreceivable are maintained based on historical payment patterns, aging of accounts receivable and actual write-off history. As of December 31, 2013 and 2012,no allowances for doubtful accounts were deemed necessary by the Company on its accounts receivable.NOTE 10—STOCKHOLDERS' EQUITYCommon StockThe Company is authorized to issue up to 250,000,000 shares of common stock, of which 33,636,442 and 32,622,984 were outstanding atDecember 31, 2013 and 2012, respectively.In April 2012, the Company sold 6,900,000 shares of common stock at a price of $9.75 per share in a registered public offering, which includes theunderwriter's exercise of the overallotment option. The Company raised $62.9 million in net proceeds after deducting discounts and offering expenses.Convertible Preferred StockThe Company is authorized to issue up to 5,000,000 shares of preferred stock. No preferred stock was outstanding at December 31, 2013 or 2012.Treasury Stock The Company issued 1,065 shares of common stock from treasury stock to settle the exercise of stock options during the year ended December 31,2013.WarrantsAt December 31, 2013 and 2012, the Company had 58,354 and 490,464 warrants outstanding at a weighted average exercise price of $11.73 and$10.79, respectively.Accumulated Other Comprehensive IncomeThe following table illustrates the changes in the balances of the Company's accumulated other comprehensive income (in thousands): Net Unrealized Gains(Losses) From AvailableFor Sale InvestmentsBalance at December 31, 2011$15Other comprehensive income before reclassifications12Amounts reclassified from accumulated other comprehensive income—Balance at December 31, 201227Other comprehensive loss before reclassifications(23)Amounts reclassified from accumulated other comprehensive income1Balance at December 31, 2013$5F-21NOTE 11—STOCK PLANSThe Company's 2011 stock incentive plan, or 2011 Plan, was adopted by its board of directors and approved by its stockholders in December 2010.The 2011 Plan reserves for the grant of incentive stock options, non-statutory stock options, restricted stock awards and other stock-based awards. Theremaining shares available for issuance under a 2007 stock incentive plan, or 2007 Plan, were reallocated to the 2011 Plan.The following table contains information about the Company's plans at December 31, 2013:PlanAwards Reservedfor Issuance Awards Issued Awards Availablefor Grant2011 Plan3,181,331 3,015,109 166,2222007 Plan2,023,206 2,023,206 — 5,204,537 5,038,315 166,222Stock-Based CompensationThe Company recognized stock-based compensation in its consolidated statements of operations for the years ended December 31, 2013, 2012 and 2011as follows (in thousands): Year Ended December 31, 2013 2012 2011Cost of revenues$1,526 $563 $218Research and development4,345 1,155 804Selling, general and administrative5,642 3,058 1,471Total$11,513 $4,776 $2,493In connection with the resignations of two directors, the Company's board of directors approved amendments to the stock options held by each of thedeparting directors. The amendments (i) accelerated the vesting of the unvested portion of certain options, and (ii) extended the period during which eachdeparting director could exercise all vested options to September 30, 2015. As a result of these amendments, the Company recognized an additional $0.2million in stock-based compensation expense for the year ended December 31, 2013.The following table summarizes the Company's stock option activity and related information for the period from January 1, 2011 to December 31,2013 (in thousands except share and per share amounts):F-22Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (Continued)NOTE 11—STOCK PLANS (Continued) Number ofShares WeightedAverage ExercisePrice Weighted AverageRemainingContractualTerm (Years) AggregateIntrinsic Value(in Thousands)Outstanding at January 1, 20112,073,700 2.69 9.7 $6Granted395,234 10.21 Exercised(67,456) 2.01 $420Forfeited(62,776) 5.05 Expired(1,685) 2.69 Outstanding at December 31, 20112,337,017 3.92 8.80 $11,829Granted2,120,250 11.55 Exercised(279,476) 2.75 $3,005Forfeited(174,610) 7.94 Expired(15) 7.07 Outstanding at December 31, 20124,003,166 7.86 8.66 $38,485Granted918,915 30.42 Exercised(742,211) 5.19 $21,679Forfeited(338,145) 10.93 Expired(1,687) 7.24 Outstanding at December 31, 20133,840,038 $13.50 8.01 $168,905Exercisable at December 31, 20131,621,357 $7.18 7.19 $81,569Vested and expected to vest at December 31, 20133,733,487 $13.30 7.99 $164,989As of December 31, 2013, $28.3 million of total unrecognized compensation cost related to non-vested stock options is expected to be recognized over aweighted average period of approximately three years. The Company's stock options have a maximum expiration date of ten years from the date of grant.The weighted average fair value of stock options granted for the years ended December 31, 2013, 2012 and 2011 was $19.22, $8.52 and $7.06 pershare, respectively. The fair values of stock options granted were estimated using the Black-Scholes option pricing model with the following weighted averageassumptions: Year Ended December 31, 2013 2012 2011Expected dividend yieldNone None NoneRisk free interest rate0.33 - 2.83% 0.84 - 1.70% 1.1 - 2.7%Expected volatility68.7% 74.0% 76.8%Expected term of options6.22 years 6.76 years 6.73 yearsNOTE 12—EARNINGS PER SHAREBasic earnings per share is calculated by dividing the net loss attributable to common shares by the weighted average number of shares outstandingduring the period, without consideration for common stock equivalents. Diluted earnings per share is calculated by dividing the net loss attributable tocommon shares by the weighted average number of shares outstanding plus common stock equivalents computed using the treasury stock method. Forpurposes of this calculation, convertible preferred stock, stock options and warrants are considered to be common stock equivalents and are only included inthe calculation of diluted net loss per share when their effect is dilutive. The following table sets forth the computation of basic and diluted loss per share forthe years ended December 31, 2013, 2012 and 2011 (in thousands except per share amounts):F-23Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (Continued)NOTE 12—EARNINGS PER SHARE (Continued) Year Ended December 31, 2013 2012 2011Numerator: Net loss$(63,909) $(52,281) $(43,328)Denominator: Weighted average shares of common stock outstanding33,182 30,332 16,437Net loss per share: Basic and diluted net loss per share of common stock$(1.93) $(1.72) $(2.64)Stock options, conversion premium on the Notes and warrants are excluded from the calculation of diluted loss per share because the net loss for theyears ended December 31, 2013, 2012 and 2011 causes such securities to be anti-dilutive. As discussed in Note 8, Debt, the Company must settle theprincipal of the Notes in cash upon conversion and it may settle any conversion premium in either cash or stock at the Company's discretion. For purposes ofcalculating dilutive impact, it is presumed that the conversion premium will be settled in common stock and the resulting potential common shares included inthe diluted net loss per share if the effect is dilutive. The potential dilutive effect of these securities is shown in the chart below (in thousands): Year Ended December 31, 2013 2012 2011Stock options2,103 1,276 1,177Conversion premium on the Notes1,194 — —Warrants79 161 110Total3,376 1,437 1,287NOTE 13—COST OF REVENUESCost of revenues consists of the following (in thousands): Year Ended December 31, 2013 2012 2011Cost of goods sold$54,772 $31,744 $15,310Cost of collaborative licensing and development— 395 1,429Total cost of revenues$54,772 $32,139 $16,739Cost of goods sold consists of the manufacturing and allocated overhead costs related to the Company's products. Cost of collaborative licensing anddevelopment consists of the Company's expenses related to feasibility studies and development work for third parties who desire to utilize the Company'sDepoFoam extended release drug delivery technology for their products. Cost of goods sold and cost of collaborative licensing and development both includeroyalties due to Research Development Foundation, or RDF, for the use of DepoFoam technology.F-24NOTE 14—INCOME TAXESA reconciliation of income taxes at the U.S. federal statutory rate to the provision for income taxes is as follows: Year Ended December 31, 2013 2012 2011Benefit at U.S. Federal statutory rate35.00 % 35.00 % 35.00 %State taxes—deferred4.79 % 6.73 % 3.98 %Increase in valuation allowance(42.91)% (39.62)% (38.27)%Tax credits1.69 % — % 0.13 %Other2.12 % (2.11)% (0.84)%Provision for income taxes0.69 % — % — %There is no provision for federal income taxes since the Company has incurred net operating losses since inception. During 2013, the Company sold aportion of its unused New Jersey State net operating losses through a program sponsored by the New Jersey Economic Development Authority. Cash proceedsof $0.4 million were received by the Company resulting in a state tax benefit recognized during the year ended December 31, 2013.Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): December 31, 2013 2012Deferred tax assets: Federal and state net operating loss carry-forwards$114,819 $89,150Federal and state research credits5,149 3,631Depreciation and amortization3,248 3,891Accruals and reserves1,696 3,388Deferred revenue1,707 1,897Other3,374 1,997Total deferred tax assets129,993 103,954Deferred tax liabilities: Convertible notes(8,507) — 121,486 103,954Less: valuation allowance for deferred tax assets(121,486) (103,954)Net deferred tax assets$— $—The Company has significant federal and state net operating loss carryforwards and federal and state research and development tax creditcarryforwards. As of December 31, 2013, federal and state net operating losses totaled $286.0 million and $256.4 million, respectively. The Company alsohad federal and state research and development tax credit carry-forwards of approximately $3.7 million and $2.3 million, respectively. The net operating losscarryforwards and research and development tax credits may expire and not be used. The net operating loss carryforwards will begin expiring in 2026 forfederal purposes and 2015 for state purposes if the Company has not used them prior to that time, and the federal tax credits will begin expiring in 2028unless previously used. The state tax credits carry forward indefinitely. There is significant doubt regarding the Company's ability to utilize its net deferred taxassets and, therefore, the Company has recorded a full valuation allowance. During 2013, the Company recorded a deferred tax liability of $10.1 million inconnection with the Notes which was fully offset by a reduction in the tax valuation allowance.The valuation allowance for deferred tax assets increased by approximately $17.5 million, $20.7 million and $16.6 million during the years endedDecember 31, 2013, 2012 and 2011, respectively.F-25Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (Continued)NOTE 14—INCOME TAXES (Continued)The Company's ability to use any net operating loss and credit carryforwards to offset taxable income or tax, respectively, in the future will be limitedunder Internal Revenue Code Sections 382 and 383 since the Company had a cumulative change in ownership of more than 50% within the three-year period.Such an ownership change was triggered by the cumulative ownership changes arising as a result of the completion of the initial public offering and otherfinancing transactions. Because of the ownership change, the Company will be limited regarding the amount of net operating loss carryforwards and researchtax credits that it can utilize annually in the future to offset taxable income or tax, respectively. The annual limitation may significantly reduce the utilization ofthe net operating loss carryforwards and research tax credits before they expire. In addition, California and certain states have suspended use of net operatingloss carryforwards for certain taxable years, and other states are considering similar measures. As a result, the Company may incur higher state income taxexpense in the future.The Acquisition was treated as a stock acquisition for tax purposes and, therefore, the acquired intangibles for book purposes are not deductible forincome tax purposes. The Company also recorded goodwill relating to contingent payments due under the Acquisition during the years ended December 31,2013 and 2012, which is not deductible for income tax purposes.In connection with the adoption of stock-based compensation guidance in 2006, the Company elected to follow the with-and-without approach todetermine the sequence in which deductions and net operating loss carryforwards are utilized. Accordingly, no tax benefit related to stock options wasrecognized in the current year. At December 31, 2013, the Company has approximately $6.5 million of net operating loss carryforwards that relate to stock-based compensation for which future tax benefits will be credited to equity when realized through a reduction of taxes payable.The Company evaluates its uncertain tax positions in a two-step process. The Company first determines whether it is more-likely-than-not that a taxposition will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amountof benefit to be recognized in the financial statements. The tax position is measured as the largest amount of benefit that has a greater than 50% likelihood ofbeing realized upon ultimate settlement.The Company did not have a liability related to unrecognized tax benefits as of December 31, 2013 and 2012 due to operating losses but has reduced itsdeferred tax assets by $0.4 million at December 31, 2013 and 2012. Further, because the Company has recorded a full valuation allowance on its net deferredassets, the effect of implementing ASC 740 has been a reduction of the allowance by the amount above. A reconciliation of the beginning and ending amount ofgross unrecognized tax benefit is as follows: Year Ended December 31, 2013 2012Balance at beginning of year$420 $420Increases related to tax positions taken during the current year— —Increases related to tax positions taken during a prior period— —Balance at end of year$420 $420The Company recognizes interest and penalties related to unrecognized tax benefits as tax expense. No interest or penalties were accrued for 2013, 2012or 2011. The Company is currently open for audit by the United States Internal Revenue Service, or IRS, and state tax jurisdictions for 2007 through 2013.However, the IRS or state may still examine and adjust a net operating loss arising from a closed year to the extent it is utilized in an open tax year. TheAmerican Tax Relief Act of 2012, enacted on January 2, 2013, retroactively reinstated the research and development tax credit for 2012. The Companyreported credits of approximately $0.2 million for federal income tax purposes in the first quarter of 2013 related to 2012.NOTE 15—OTHER EMPLOYEE BENEFITSThe Company sponsors a 401(k) savings plan. Under the plan, employees may make contributions to the plan, which are eligible for a discretionarypercentage match as defined in the plan and determined by the board of directors. The Company recognized $0.6 million, $0.3 million and $0.2 million ofrelated compensation expense for the years ended December 31, 2013, 2012 and 2011, respectively.F-26NOTE 16—COMMERCIAL PARTNERS AND OTHER AGREEMENTSCommercial PartnersAratana Therapeutics, Inc.On December 5, 2012, the Company entered into a worldwide license, development and commercialization agreement with Aratana Therapeutics, Inc.,or Aratana. Under the agreement, the Company granted Aratana an exclusive royalty-bearing license, including the limited right to grant sublicenses, for thedevelopment and commercialization of the Company's bupivacaine liposome injectable suspension product for animal health indications. Under the agreement,Aratana will develop and seek approval for the use of the product in veterinary surgery to manage postsurgical pain, focusing initially on developing theproduct for cats, dogs and other companion animals. In connection with its entry into the license agreement, the Company received a one-time payment of $1.0million and is eligible to receive up to an additional aggregate $42.5 million upon the achievement of development and commercial milestones. Once the producthas been approved by the FDA for sale in the United States, Aratana will be required to pay the Company a tiered double digit royalty on net sales made in theUnited States. If the product is approved by foreign regulatory agencies for sale outside of the United States, Aratana will be required to pay the Company atiered double digit royalty on such net sales. Royalty rates will be reduced by a certain percentage upon the entry of a generic competitor for animal healthindications into a jurisdiction or if Aratana must pay royalties to third parties under certain circumstances. In December 2013, the Company received a $0.5million milestone payment under the agreement.Mundipharma International Holdings LimitedIn June 2003, the Company entered into an agreement granting Mundipharma International Holdings Limited exclusive marketing and distribution rightsto DepoCyte in the European Union and certain other European countries. Under the agreement, as amended, and a separate supply agreement, the Companyreceives a fixed payment for manufacturing the vials of DepoCyte and a double-digit royalty, net of supply price, on sales in the applicable territories.Sigma-Tau Pharmaceuticals, Inc.In December 2002, the Company entered into a supply and distribution agreement with Enzon Pharmaceuticals Inc., subsequently acquired by Sigma-Tau Pharmaceuticals, Inc., or Sigma-Tau, regarding the sale of DepoCyt. Pursuant to the agreement, Sigma-Tau was appointed the exclusive distributor ofDepoCyt in the United States and Canada. Under the supply and distribution agreement, the Company supplies unlabeled DepoCyt vials to Sigma-Tau forfinished packaging by Sigma-Tau. Under these agreements, the Company receives a fixed payment for manufacturing the vials of DepoCyt and a double-digitroyalty on sales, net of supply price, in the United States and Canada.EKR Therapeutics, Inc.On January 3, 2012, EKR Therapeutics, Inc., or EKR, delivered a notice to the Company to terminate the licensing, distribution and marketingagreement relating to DepoDur. Pursuant to the terms of the agreement, the termination of the agreement was effective on July 1, 2012. The associated supplyagreement also terminated concurrently with the termination of the licensing, distribution and marketing agreement. Both parties agreed to terminate theagreements effective June 8, 2012. As a result of the termination, the Company recognized any unamortized deferred revenue relating to the agreement on astraight-line basis through the termination date in June 2012.Flynn Pharmaceuticals LimitedOn October 29, 2012, the Company terminated the marketing agreement with Flynn Pharma Limited, which had granted exclusive distribution rights toDepoDur in the European Union, certain other European countries, South Africa and the Middle East. The supply agreement terminated concurrently with themarketing agreement. The termination was effective immediately. As a result of the termination, the Company recognized any unamortized deferred revenuerelating to the agreement upon termination.Other AgreementsIn the ordinary course of its business activities, the Company enters into agreements with third parties who desire access to its proprietary DepoFoamextended release drug delivery technology to conduct research, feasibility and formulation work. Under these agreements, the Company is compensated toperform feasibility testing on a third party product to determine theF-27Table of ContentsPacira Pharmaceuticals, Inc.Notes to Consolidated Financial Statements (Continued)NOTE 16—COMMERCIAL PARTNERS AND OTHER AGREEMENTS (Continued)likelihood of developing a successful formulation of that product using its proprietary DepoFoam extended release drug delivery technology. If successful in thefeasibility stage, these programs can advance to a full development contract.CrossLink BioScience, LLCEffective October 1, 2013, the Company and CrossLink BioScience, LLC, or CrossLink, commenced a five-year arrangement for the promotion andsale of EXPAREL pursuant to the terms of a Master Distributor Agreement. Under the agreement, the Company appointed CrossLink as the exclusive third-party distributor during the term to promote and sell EXPAREL for orthopedic and spine surgeries in the United States, with the exception of certaingeographical areas and accounts. The prices and purchasing terms related to sales of EXPAREL are determined by the Company, and all orders are subject toacceptance or rejection by the Company. CrossLink is entitled to receive commissions on its sales of EXPAREL in the applicable territories, subject to certainconditions and adjustments. CrossLink may receive additional performance-based payments if it achieves certain sales goals, and the Company mayterminate the agreement if CrossLink fails to meet certain minimum performance metrics.Novo Nordisk ASOn June 29, 2012, the Company received a notice of termination from Novo Nordisk AS, or Novo, of the Development and License Agreement, datedJanuary 14, 2011, which had granted non-exclusive rights to Novo under certain of its patents and know-how to develop, manufacture and commercializeformulations of a Novo proprietary drug using the Company's DepoFoam drug delivery technology. The Company received a one-time upfront payment of$1.5 million in January 2011 and a milestone payment of $2.0 million in November 2011, both of which had been deferred and was being recognized on astraight-line basis over the estimated contract period to collobrative licensing and development revenue in the consolidated statements of operations. Pursuant tothe terms of the agreement, the termination of the agreement was effective on August 28, 2012. The agreement was terminated due to Novo's decision todiscontinue development of the proprietary drug subject to the agreement. As a result of the termination, the Company recognized any unamortized deferredrevenue relating to the agreement on a straight-line basis through the termination date in August 2012.Amylin Pharmaceuticals, Inc.In March 2008, the Company entered into a development and licensing agreement with Amylin Pharmaceuticals, Inc., or Amylin. Under thedevelopment and licensing agreement, the Company provides Amylin with access to its proprietary DepoFoam drug delivery technology to conduct research,feasibility and formulation work, and for the manufacturing of pre-clinical and clinical material for various Amylin products. The Company is entitled topayments from Amylin for its work on the formulation and development of compounds with the DepoFoam technology, its achievement of certain clinicaldevelopment milestones, its achievement of certain worldwide sales and a tiered royalty based upon sales. The development and licensing agreement withAmylin remains effective, however, neither party is currently performing any activities under the agreement.Research Development FoundationPursuant to an agreement with RDF, the Company is required to pay RDF a low single-digit royalty on the collection of revenues from its DepoFoam-based products, for as long as certain patents assigned to the Company under the agreement remain valid. RDF has the right to terminate the agreement for anuncured material breach by the Company, in connection with its bankruptcy or insolvency or if it directly or indirectly opposes or disputes the validity of theassigned patent rights.NOTE 17—RELATED PARTY TRANSACTIONSThe Company's Chief Medical Officer, Dr. Gary Patou, is a partner of MPM Asset Management LLC, or MPM, an investor in the Company. DavidStack, the Company's President, Chief Executive Officer and Chairman is also a managing director at MPM. The Company contracted with MPM and Dr.Patou for the services of Dr. Patou, or Consultant. MPM earned monthly consulting fees between $16,000 and $26,000 in exchange for 50% to 80% ofConsultant's business time. The Company incurred expenses of $0.3 million, $0.4 million and $0.5 million for the years ended December 31, 2013, 2012 and2011, respectively. At both December 31, 2013 and 2012, the amount payable to MPM was $0.1 million.F-28In December 2012, the Company entered into a worldwide license, development and commercialization agreement with Aratana as discussed in Note 16,Commercial Partners and Other Agreements. MPM and its affiliates are holders of capital stock of Aratana.In April 2012, the Company entered into a consulting agreement with Dr. Gary Pace, a director of the Company, whereby Dr. Pace would provideconsulting services. Pursuant to the consulting agreement and subsequent amendments, the consulting services are paid at the rate of $5,000 to $15,000 permonth based on the number of days worked. In connection with the consulting arrangement, Dr. Pace received an option to purchase 20,000 shares of commonstock at an exercise price of $11.02 per share and received an option to purchase 70,000 shares of common stock at an exercise price of $16.67 per share. TheCompany recorded expenses under the consulting arrangement for the years ended December 31, 2013, 2012 and 2011 of $0.1 million, $0.2 million and $0.0million, respectively. The amounts payable at December 31, 2013 and 2012 to Dr. Pace were less than $0.1 million.NOTE 18—COMMITMENTS AND CONTINGENCIESLeasesIn August 2011, the Company entered into a lease contract for its corporate headquarters in Parsippany, New Jersey. The lease, which occupiesapproximately 13,000 square feet, expires in June 2017. Under the lease, the Company is required to pay certain maintenance expenses in addition to rent.The Company also leases research and development and manufacturing facilities in San Diego, California, in two buildings occupying approximately106,000 square feet, referred to as the Science Center Campus. On March 13, 2013, the Company entered into amendments with HCP TPSP, LLC andLASDK L.P., or Landlord, to extend the lease term on the Science Center Campus. Pursuant to the amended lease agreements, the leases of both buildings wereextended through August 31, 2020 with an option to extend the lease term for an additional five years. The amendments provide that the Landlord will pay aone-time tenant improvement allowance in the amount of $1.6 million for costs relating to the initial design and construction of the Company’s improvementsthat are permanently affixed to the premises. It also provides that the Company can increase the tenant improvement allowance by an amount not to exceed $1.4million for base building work. Monthly basic rent is not adjusted on account of any portion of the base building allowance paid to the Company. If theCompany fails to utilize the tenant improvement allowance by June 30, 2015, any unused amounts will revert back to the Landlord, and the Company willhave no further rights with respect thereto. The Company has received a total of $0.7 million in tenant improvement allowances as of December 31, 2013. TheCompany is required to pay certain maintenance expenses in addition to the monthly rent.In connection with the Acquisition, the Company determined that its lease rates associated with the Science Center Campus were in excess of marketrates resulting in a $3.3 million unfavorable lease accrual as of the Acquisition date. The unfavorable lease accrual, which is recorded in other long-termliabilities in the Company's consolidated balance sheets, is amortized over the remaining terms of the leases. The annual amortization of the unfavorable leaseaccrual for each of the years ended December 31, 2013, 2012 and 2011 was $0.1 million, $0.4 million and $0.4 million, respectively.In May 2013, the Company entered into an agreement with Sorrento Montaña, L.P. to lease warehouse space in San Diego, California to be usedprimarily for the storage of inventory. The lease term expires on August 31, 2020.As of December 31, 2013, aggregate annual minimum payments due under the Company's lease obligations are as follows (in thousands):Year Payments2014 $4,7652015 4,9782016 5,1302017 5,0722018 5,017Thereafter 8,717Total $33,679F-29NOTE 18—COMMITMENTS AND CONTINGENCIES (Continued)Total rent expense, net of amortization of unfavorable lease obligation and tenant improvements, under all operating leases for years ended December 31,2013, 2012 and 2011 was $4.9 million, $4.8 million and $4.7 million, respectively. Deferred rent at December 31, 2013 and 2012 was $2.3 million and $1.3million, respectively.LitigationThe Company periodically becomes subject to legal proceedings and claims arising in connection with its business. The ultimate legal and financialliability of the Company in respect to all claims, lawsuits and proceedings cannot be estimated with any certainty. Any outcome, either individually or in theaggregate, is not expected to be material to the Company's consolidated financial position, results of operations, or cash flows.Other Contingencies and CommitmentsIn May 2012, the Company entered into a construction management agreement with DPR Construction, a general partnership, or DPR. Under the termsof the agreement, DPR is responsible for the management of the renovation of the Company's existing manufacturing facility in San Diego, California. Themanufacturing facility is being renovated to allow the Company to expand the current manufacturing capacity and meet anticipated future market demand forEXPAREL. Pursuant to the agreement, the contract sum (the cost of the work plus the contractor fee) will not exceed approximately $7.7 million, provided thatsuch amount is subject to change based on agreed-upon changes to the scope of work.The FDA, as a condition of the EXPAREL approval, has required the Company to study EXPAREL in pediatric patients. The Company has agreed to atrial timeline where, over several years, it will study pediatric patient populations in descending order starting with 12-18 year olds and ending with childrenunder two years of age. The cost to complete the trial may be significant.In addition to the initial $19.6 million purchase price for the Acquisition, the Company entered into an earn-out agreement with SkyePharma which wasbased on the Company reaching certain revenue milestones following the Acquisition. Pursuant to this agreement, the Company is required to paySkyePharma milestone payments up to an aggregate of $62.0 million, of which $10.0 million has been paid. Additionally, the Company agreed to pay toSkyePharma a 3% percentage payment on collections of EXPAREL sales in the United States, Japan, the United Kingdom, France, Germany, Italy andSpain.Such obligations to make percentage payments will continue for the term in which such sales related to EXPAREL are covered by a valid claim incertain patent rights related to EXPAREL and other biologics products. The expiration date of the last valid claim will occur in 2018. The Company has theright to cease paying the 3% percentage payments in the event that SkyePharma breaches certain covenants not to compete contained in the stock purchaseagreement. In the event that the Company ceases to sell EXPAREL and begin marketing a similar replacement product for EXPAREL, it would no longer beobligated to make percentage payments, but it may be required to make certain milestone payments upon reaching certain sales milestones.Refer to Note 6, Goodwill and Intangible Assets, for further discussion.NOTE 19—SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)The following table presents selected quarterly financial data for the years ended December 31, 2013 and 2012 (in thousands, except per share data): Three Months Ended March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31, 2013 2013 2013 2013 2012 2012 2012 2012Totalrevenues$11,587 $17,141 $23,259 $33,564 $7,804 $12,344 $8,486 $10,450Cost ofrevenues11,391 10,214 14,791 18,376 6,495 6,685 9,287 9,672Total operatingexpenses30,232 29,151 36,073 43,384 18,941 18,970 24,192 26,279Net loss(23,138) (14,031) (14,784) (11,956) (11,894) (8,296) (15,745) (16,346)Basic anddiluted netloss percommon share$(0.71) $(0.42) $(0.44) $(0.36) $(0.47) $(0.27) $(0.49) $(0.50)F-30Table of ContentsEXHIBIT INDEXExhibitnumber Description3.1 Amended and Restated Certificate of Incorporation of the Registrant.(1)3.3 Amended and Restated Bylaws of the Registrant.(1)4.1 Specimen Certificate evidencing shares of common stock.(2)4.2 Indenture (including form of Notes), dated January 23, 2013, between the Registrant and Wells Fargo Bank, National Association, astrustee.(3)10.1 Second Amended and Restated 2007 Stock Option/Stock Issuance Plan.(2)***10.2 Form of Stock Option Agreement under the Second Amended and Restated 2007 Stock Option/Stock Issuance Plan.(2)***10.3 Investors' Rights Agreement, dated March 23, 2007, among the Registrant and the parties named therein.(2)10.4 Assignment Agreement, dated February 9, 1994, amended April 15, 2004, between the Registrant and Research DevelopmentFoundation.(2)10.5 Stock Purchase Agreement, dated January 8, 2007, between SkyePharma, Inc. and the Registrant.(2)10.6 Amended and Restated Royalty Interests Assignment Agreement, dated March 23, 2007, as amended, between SkyePharma, Inc. andRoyalty Securitization Trust I.(2)10.7 Amended and Restated Security Agreement (SKPI), dated March 23, 2007, between SkyePharma, Inc. and Royalty Securitization TrustI.(2)10.8 Supply Agreement, dated June 30, 2003, between SkyePharma, Inc. and Mundipharma Medical Company.(2)10.9 Distribution Agreement, dated June 30, 2003, between SkyePharma, Inc. and Mundipharma International Holdings Limited.(2)10.10 Distribution Agreement, dated July 27, 2005, between SkyePharma, Inc. and Mundipharma International Holdings Limited.(2)10.11 Co-development, Collaboration and License Agreement, dated January 2, 2003, among Enzon Pharmaceuticals, Inc., Jagotec, AG,SkyePharma, Inc. and SkyePharma PLC.(2)10.12 DepoCyt Supply and Distribution Agreement, dated December 31, 2002, between SkyePharma, Inc. and Enzon Pharmaceuticals, Inc.(2)10.13 Industrial Real Estate Triple Net Lease, dated August 17, 1993, between Pacira Pharmaceuticals, Inc. and HCP TPSP, LLC.(2)10.14 Fifth Amendment, dated March 13, 2013, to the Industrial Real Estate Triple Net Lease, dated August 17, 1993, among the Registrant,Pacira Pharmaceuticals, Inc. and HCP TPSP, LLC (and successor-in-interest to Equitable Life Assurance Society of the United States).(4)10.15 Industrial Real Estate Lease, dated December 8, 1994, amended July 2, 2009, between Pacira Pharmaceuticals, Inc. and LASDK LimitedPartnership.(2)10.16 Third Amendment, dated March 13, 2013, to the Industrial Real Estate Lease, dated December 8, 1994, among the Registrant, PaciraPharmaceuticals, Inc. and LASDK Limited Partnership (and successor-in-interest to Lankford & Associates, Inc.).(4)10.17 Services Agreement, dated October 28, 2010, between the Registrant, MPM Asset Management LLC and Gary Patou.(2)***10.18 Amendment to Services Agreement, dated October 28, 2010, between the Registrant, MPM Asset Management LLC and GaryPatou.(6)***10.19 Services Agreement, dated September 15, 2010, between Pacira Pharmaceuticals, Inc. and Stack Pharmaceuticals, Inc.(2)10.20 Employment Agreement between the Registrant and David Stack.(2)***10.21 Amendment No. 1 to Executive Employment Agreement, dated March 13, 2013, between the Registrant and David Stack.(4)***10.22 Employment Agreement between the Registrant and James Scibetta.(2)***10.23 Amendment No. 1 to Executive Employment Agreement, dated March 13, 2013, between the Registrant and James Scibetta.(4)***10.24 Warrant to purchase preferred stock of the Registrant, dated November 24, 2010.(2)10.25 Form of Warrant to purchase Series A convertible preferred stock of the Registrant, dated July 2, 2009.(2)10.26 Form of Warrant to purchase common stock of the Registrant, dated January 22, 2009.(2)10.27 Form of Warrant to purchase common stock of the Registrant, dated December 29, 2010.(2)10.28 Form of Indemnification Agreement between the Registrant and its directors and officers.(2)***Table of Contents10.29 Commercial Outsourcing Services Agreement entered into as of August 25, 2011 by the Registrant and Integrated CommercializationSolutions, Inc.(5)10.30† First Amendment to Commercial Outsourcing Services Agreement, dated August 1, 2013, between the Registrant and IntegratedCommercialization Solutions, Inc.(8)10.31 Amended and Restated Consulting Agreement, dated April 3, 2012, between the Registrant and Gary Pace.(7)***10.32 Executive Employment Agreement, dated November 1, 2010, between the Registrant and Taunia Markvicka.(7)***10.33 Amendment No. 1 to Executive Employment Agreement, dated March 13, 2013, between the Registrant and Taunia Markvicka.(4)***10.34 Employment Agreement, dated April 19, 2012, between the Registrant and Lauren Riker.(7)***10.35 Amendment No. 1 to Employment Agreement, dated March 13, 2013, between the Registrant and Lauren Riker.(4)***10.36 Amended and Restated 2011 Stock Option Plan.(9)***10.37 Construction Management Agreement between the Registant and DPR, dated May 17, 2012.(10)10.38 Loan and Security Agreement between the Registrant and Oxford Finance LLC, dated May 2, 1012(10)10.39 Warrant to Purchase Stock No 1, 2, 3 and 4, issued by the Registrant to Oxford Finance LLC, dated May 2, 2012(10)10.40 Second Amended and Restated Consulting Agreement, dated August 17, 2012, between the Registrant and Gary Pace.(11)***10.41 Third Amendment to Consulting Agreement, dated September 11, 2013, between the Registrant and Gary Pace.(8)***10.42 Amendment #2 to Services Agreement, between the Registrant and MPM Asset Management LLC, and Gary Patou, dated November 29,2012.(12)***10.43 Amendment #3 to Services Agreement, dated September 11, 2013, among the Registrant, MPM Asset Management LLC, and GaryPatou.(8)***10.44† License, Development and Commercialization Agreement, dated December 5, 2012 between the Registrant and AratanaTherapeutics, Inc.(13)10.45† Supply Agreement, dated December 5, 2012 between the Registrant and Aratana Therapeutics, Inc.(13)10.46† Master Distributor Agreement, dated March 11, 2013, between the Registrant and CrossLink BioScience, LLC.*10.47† First Amendment to Master Distributor Agreement, dated April 1, 2013, between the Registrant and Crosslink BioScience, LLC.*10.48† Second Amendment to Master Distributor Agreement, dated September 5, 2013, between the Registrant and Crosslink BioScience, LLC.*21.1 Subsidiaries of Registrant.*23.1 Consent of CohnReznick LLP.*31.1 Certification of President, Chief Executive Officer and Chairman pursuant to Exchange Act Rule 13a-14(a)*31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)*32.1 Certification of President, Chief Executive Officer and Chairman pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002**32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002**101.INS*XBRL Instance Document.101.CAL*XBRL Taxonomy Calculation Linkbase Document.101.LAB*XBRL Taxonomy Label Linkbase Document.101.PRE*XBRL Taxonomy Presentation Linkbase Document.101.DEF*XBRL Taxonomy Extension Definition Linkbase Document._______________________________________________________________________________(1)Incorporated by reference to the registrant's Current Report on Form 8-K, filed on February 11, 2011.(2)Incorporated by reference to the exhibits to the registrant's Registration Statement on Form S-1 (SEC File 333-170245).(3)Incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K, filed on January 23, 2013.(4)Incorporated by reference to the exhibits to the registrant’s Current Report on Form 8-K, filed on March 18, 2013.(5)Incorporated by reference to the exhibits to the registrant's Quarterly Report on Form 10-Q, filed on October 31, 2011.(6)Incorporated by reference to the exhibits to the registrant's Current Report on Form 8-K, filed on December 9, 2011.(7)Incorporated by reference to the exhibits to the registrant's Quarterly Report on Form 10-Q, filed on May 9, 2012.Table of Contents(8)Incorporated by reference to the exhibits to the registrant’s Quarterly Report on Form 10-Q, filed on October 31, 2013.(9)Incorporated by reference to the exhibits to the registrant's Current Report on Form 8-K, filed on June 7, 2012.(10)Incorporated by reference to the exhibits to the registrant's Quarterly Report on Form 10-Q, filed on August 9, 2012.(11)Incorporated by reference to the exhibits to the registrant's Quarterly Report on Form 10-Q, filed on November 1, 2012(12)Incorporated by reference to the exhibits to the registrant's Current Report on Form 8-K, filed on December 4, 2012.(13)Incorporated by reference to the exhibits to the registrant’s Annual Report on Form 10-K, filed on March 7, 2013.*Filed herewith.**Furnished herewith.***Denotes management contract or compensatory plan or arrangement.†Confidential treatment requested as to certain portions, which portions were omitted and filed separately with the Securities and Exchange Commissionpursuant to a Confidential Treatment Request.Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheetsat December 31, 2013 and 2012, (ii) Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011, (iii) ConsolidatedStatements of Comprehensive Loss for the years ended December 31, 2013, 2012 and 2011, (iv) Consolidated Statements of Stockholders' Equity(Deficit) for the years ended December 31, 2013, 2012 and 2011, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2013,2012 and 2011 and (vi) Notes to Consolidated Financial Statements.CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF THIS EXHIBIT. THE REDACTIONSARE INDICATED WITH “[**]”. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED WITH THE U.S. SECURITIES ANDEXCHANGE COMMISSION.MASTER DISTRIBUTOR AGREEMENTTHIS MASTER DISTRIBUTOR AGREEMENT (the “Agreement”) is made the 11th day of March, 2013, but effective asof April 1, 2013 (the “Effective “Date”) by and between Pacira Pharmaceuticals, Inc., a California corporation (hereinafter called“Pacira”), and Crosslink BioScience, LLC, a Georgia limited liability company (hereinafter called “Master Distributor”).WITNESSETH:WHEREAS, the Parties hereto desire to enter into this Agreement upon the terms hereinafter set forth so as to promote thesale of EXPAREL® (bupivacaine liposome injectable suspension (the “Product”) for all orthopedic and spine surgeries throughout theTerritory (as hereinafter defined).NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereby agreeas follows:1.APPOINTMENT OF MASTER DISTRIBUTOR1.01For the Term (as hereinafter defined) of this Agreement, Pacira appoints Master Distributor as its exclusive distributor(except as outlined in Exhibit A) for the sale of the Product (including without limitation any enhancements andimprovements thereto) for all orthopedic and spine surgeries in the geographical area described in Exhibit A attached hereto(the “Territory”) and Master Distributor accepts this appointment, all subject to the terms and conditions of this Agreement.The Parties acknowledge and agree that the foregoing surgery cases shall include, without limitation, all surgical proceduresinvolving total hip, total knee, total shoulder, total ankle, trauma, upper and lower extremities, sports medicine, foot, ankleand spine.2.MASTER DISTRIBUTOR’S RESPONSIBILITIES2.01Master Distributor agrees to act, through itself and its Sub-Distributors (as defined in Section 2.02 below), as the exclusivedistributor (except as provided in Exhibit A) of the Product within the Territory; to diligently pursue a sales program topromote the Product; and to develop and increase the demand for the Product. Master Distributor also agrees to (i) meet withPacira following the expiration of the Pilot Period as provided on Exhibit A hereto (ii) prepare an annual business andpromotion plan for discussion, review, coordination and approval by Pacira [**] prior to start of each annual periodcommencing on October 1, 2014 (iii) provide periodic information updates on market conditions and trends relating to theProduct and forecasts on potential business opportunities, (iv) participate with Pacira in trade shows in the Territory, and(v) provide for transmission of sales bulletins, advertising literature and other information (as provided by Pacira) to actual orpotential customers of Pacira. Such responsibilities shall be accomplished through prompt and efficient customer andpotential customer services, the provision of adequate and timely sales effort, and the maintenance of a close workingrelationship with Pacira’s management. 2.02Master Distributor shall be permitted to engage the services of independent contractors (“Sub-Distributors”) to promote thesale of the Product with respect to portions of the Territory, but only after each such Sub-Distributor has been presented toPacira for review and approval, which approval shall not be unreasonably withheld. In facilitating Pacira’s review of anypotential Sub-Distributor, Master Distributor shall provide Pacira with the proposed form of contract between MasterDistributor and Sub-Distributor containing, among other things, all material economic terms between Master Distributor andthe potential Sub-Distributor. Unless Master Distributor and Pacira agree otherwise in writing, Master Distributor shallremain exclusively responsible for the servicing of all Sub-Distributor accounts and for all of the actions of each such Sub-Distributor; provided, however, notwithstanding any provision in this Agreement to the contrary, Master Distributor maycure any potential breach of this Agreement resulting directly from the actions of a Sub-Distributor by either terminating itsagreement with such Sub-Distributor within [**] of receiving notice of such breach from Pacira or taking such other actionwith such Sub-Distributor as is acceptable to Pacira to avoid breach or termination of this Agreement. Master Distributor shallremain exclusively responsible for compensating any such Sub-Distributor.2.03Master Distributor shall be responsible for all aspects of the management of any sales representatives retained by MasterDistributor, including, without limitation, all matters relating to the recruiting, hiring, supervising, training (except asotherwise provided herein), equipping/outfitting (including vehicle leasing, laptops, sample bags and similar equipment),reimbursement for expenses and compensating (including compensation, incentives, benefits, supplies, discretionaryspending funds, equipment, travel, food and lodging) such sales representatives. All employees and agents of MasterDistributor are its sole employees and agents and nothing contained herein shall be construed to make them the employees oragents of Pacira. Notwithstanding the designation of “Master Distributor”, it is understood that Master Distributor is anindependent contractor and not an employee or agent of Pacira and that nothing herein contained shall be deemed to constitutethe parties as partners or joint venturers and that there are no rights conferred upon Master Distributor by this Agreement tocontract for, or on behalf of, or otherwise obligate Pacira, in any manner.2.04Master Distributor will and shall require any Sub-Distributor to maintain complete and accurate records of all activitiescarried out by Master Distributor or Sub-Distributor, as the case may be, and each of their respective employees andrepresentatives relating to the performance of Master Distributor’s hereunder for the duration of Term and for three (3)years thereafter. Pacira shall have the right to audit such records upon reasonable notice to Master Distributor. MasterDistributor shall, and shall cause its employees, agents and representatives to, comply, in all material respects, with allapplicable laws, rules and regulations in connection with the promotion of the Product in the Territory. Without limiting thegenerality of the foregoing, Master Distributor shall in the course of its promotion of the Product and performance of itsobligations hereunder, (a) limit claims of efficacy and safety for the Product to those which are consistent with Pacira’s thenapproved promotional materials for the Product or as otherwise approved by Pacira,- 2-in each case, consistent with any legal requirements, including FDA approved Product labeling, and (b) not delete or modifyclaims of efficacy and safety in the promotion of the Product so that they are different in any way from those which arecontained in Pacira’s then approved promotional materials for the Product and the FDA approved Product labeling, or makeany changes in promotional materials and literature provided by Pacira. In addition, without limiting the generality of theforegoing, Master Distributor shall, and shall cause its employees, agents and representatives and any Sub-Distributors to, inpromoting the Product hereunder, comply in all material respects with (i) the PhRMA Code on Interactions with HealthcareProfessionals (ii) the American Medical Association Gifts to Physicians From Industry Guidelines and (iii) Section 1128B(b)of the Social Security Act.2.05Neither Master Distributor nor any Sub Distributor or any of their employees, agents or representatives will make any falseor misleading representations to customers or others regarding Pacira or the Product and will not make any representations,warranties or guarantees with respect to the specifications, features or capabilities of the Product that are not consistent withthe applicable current FDA approved labeling, package insert or other documentation accompanying or describing theProduct, including Pacira’s (or any applicable Third Party’s) standard limited warranty and disclaimers, and that has beenprovided to Master Distributor by Pacira. Master Distributor shall not enlarge, modify or amend Pacira’s guarantees,warranties, prices or other conditions of sales, shall have no authority to do so, and shall not hold itself out as having authorityto do so. All correspondence and negotiations pertaining to any sale or prospective sale of the Product shall be conducted byMaster Distributor to clearly indicate that the Product is that of Pacira.2.06Information concerning any complaints, medical inquiries and/or drug information requests from consumers, physicians orother Third Parties received by Master Distributor regarding the Product in the Territory shall be forwarded to Pacira withinforty eight (48) hours of Master Distributor’s receipt of the request and in accordance with Pacira’s policies and procedures asin effect and provided to Master Distributor from time to time and applicable laws, rules and regulations. As between Paciraand Master Distributor, Pacira shall respond to all medical inquiries received from Master Distributor in the manner Paciradeems appropriate. Pacira shall have sole responsibility for responding to any medical issues relating to the Product. Thenecessary contact information and procedures will be provided by Pacira.2.07Master Distributor shall promptly notify Pacira upon being contacted by the FDA or any other Governmental Authority inthe Territory for any regulatory purpose pertaining to this Agreement or to the Product. Master Distributor shall not respondto the FDA or such other Governmental Authority before consulting with Pacira, unless under the circumstances pursuantto which FDA or such other Governmental Authority contacts Master Distributor, it is not practical or lawful for Companyto give Pacira advance notice, in which event Master Distributor shall inform Pacira of such contact as soon as practical andlawful.- 3-2.08Master Distributor shall advise Pacira within forty eight (48) hours of any complaint, adverse reaction, injury or death in theTerritory including name, contact information, product and lot number (if available) resulting from the use of any Product ofwhich it becomes aware. Master Distributor shall within five (5) days thereafter provide Pacira with a report stating the fullfacts known to it and cooperate fully with Pacira in its investigation of the facts.2.09Master Distributor (through itself and its Sub-Distributors) shall carry on such activities within the Territory and maintainsuch offices and other facilities as are reasonably necessary and appropriate for the promotion and sale of the Product in theTerritory, including making its representatives, employees, management and other personnel performing services hereunderavailable during normal business hours.2.10Unless this Agreement is terminated (as provided in Section 8.01 below) following the conclusion of the Pilot Period (asdefined in Section 8.01 below), Master Distributor shall attain the Minimum Annual Performance Goals. The performancegoals for the [**] of the Subsequent Period (as defined in Section 8.01 below) are defined and set forth in Exhibit B attachedhereto (the “Minimum Annual Performance Goals”).2.11Master Distributor shall be responsible for obtaining inquiries and/or requests for orders from customers and potentialcustomers of Pacira and turning them into Pacira. Inquiries and/or requests for orders will be processed by Pacira and filledusing Pacira’s established distribution system.2.12Master Distributor shall indemnify, defend and hold harmless Pacira, its directors, officers, employees, and agents and itssuccessors and assigns (the “Pacira Indemnitee(s)”) from and against all third party claims, losses, costs, and liabilities(including, without limitation, payment of reasonable attorneys' fees and other reasonable expenses of litigation), and shallpay any damages (including settlement amounts) finally awarded, with respect to claims, suits or proceedings brought bythird parties against a Pacira Indemnitee, arising out of or relating to (a) a breach by Master Distributor (or any DistributorIndemnitee as defined in Section 3.03), (b) the negligence or willful misconduct of Master Distributor except, in each case tothe extent caused by the negligence or willful misconduct of a Pacira Indemnitee or (c) damage to property, or injury to, ordeath of persons, occasioned by, or in connection with, the acts or omissions, of Master Distributor, or its agents, employees,or Sub-Distributors.2.13Master Distributor shall maintain Commercial General Liability insurance (excluding Products and Completed Operationsinsurance) in an amount not less than [**] per occurrence and [**] annual aggregate coverage, Automobile Liability of notless than [**] Combined Single Limit, Worker’s Compensation insurance as required by applicable statute includingEmployer’s Liability with limits no less than [**] by bodily injury by accident/each accident; [**] by bodily injury bydisease/policy limit; [**] by bodily injury by disease/policy/each employee.- 4-2.14Master Distributor will comply in all material respects with all policies and procedures of Pacira as provided by Pacira toMaster Distributor in writing from time to time.2.15Master Distributor will be responsible for providing all required information for Pacira to completely and accurately prepareall schedules and documentation required under the Physician Payment Sunshine Act (“PPSA”). Any failure to comply withthe requirements of the PPSA by Master Distributor, in which Pacira is fined for failure to properly report, will be theresponsibility of Master Distributor and Pacira will require full reimbursement for any and all fines and costs.2.16Master Distributor’s sales personnel shall be familiar in all material respects with the Product, and Master Distributor shallconduct any training of its personnel which may be reasonably necessary to accomplish the foregoing. To that end, MasterDistributor shall, and shall cause its employees, sales representatives and each of the Sub-Distributors and their employeesand sales representatives to, participate in, and conduct their operations in accordance with, all of Pacira’s sales representativetraining and certification programs, as reasonably required by Pacira from time to time.2.17Master Distributor shall bear all the costs and expenses incurred in performing any and all of its responsibilities in this Section2 including the cost of any requested printed promotional materials or reprints of publications with such expenses being [**].Notwithstanding the foregoing, the cost for set up and additional licenses on Pacira’s Learning Management System shall be[**] and billed to Master Distributor by Pacira as incurred and payable within [**] of Pacira invoice.3.PACIRA’S RESPONSIBILITIES3.01Pacira shall provide training to all of Master Distributor’s (and each Sub-Distributor’s) sales personnel involved in thepromotion and sale of the Product during the Term of this Agreement. In addition, Pacira will furnish to Master Distributor(and each Sub-Distributor) reasonable sales training and subject to Section 2.17 above, other information which MasterDistributor (or any Sub-Distributor) may reasonably need for promotion and sale of the Product.3.02Nothing contained herein shall be deemed to prevent Pacira from employing or utilizing, at its own expense, its ownpersonnel for the purpose of advertising and promoting the sale of Product in the Territory; provided, however, MasterDistributor shall receive [**] as set forth on Exhibit C on any sale of Product in the Territory during the Term related to thesurgical cases described in Section 1.01.3.03Pacira shall indemnify, defend and hold harmless Master Distributor, the directors, officers, employees, agents and any Sub-Distributors of Master Distributor and its successors and assigns (the “Distributor Indemnitee(s)”) from and against all thirdparty claims, losses, costs, and liabilities (including, without limitation, payment of reasonable attorneys' fees and otherreasonable expenses of litigation), and shall pay any damages (including settlement amounts) finally awarded, with respect toclaims, suits or- 5-proceedings brought by third parties against a Distributor Indemnitee, arising out of or relating to (a) a material breach byPacira or its employees, agents or representatives of its obligations under this Agreement, (b) the negligence or willfulmisconduct of Pacira, except, in each case, to the extent caused by the negligence of willful misconduct of a DistributorIndemnitee, (c) personal injury or death resulting from the use of the Product, (d) defects alleged by third parties in thedesign, manufacture or composition of the Product, (e) breaches of warranty alleged by third parties with respect to theProduct, (f) infringement alleged by third parties of patents, copyrights, trademarks, or other intellectual property rightsthrough the use of the Product (except to the extent arising from Master Distributor's use of materials not approved byPacira) or (g) recalls of the Product.3.04During the Term of this Agreement, Pacira shall carry and continue in force a policy of product liability insurance for theProduct promoted hereunder by Master Distributor (including, without limitation, its Sub-Distributors) with limits of notless than [**] per occurrence and [**] aggregate. Such policy shall name Master Distributor (including, without limitation,its Sub-Distributors) as an additional insured, and Pacira shall provide Master Distributor with proof of insurance, in the formof a certificate of insurance, within [**] of the Effective Date of this Agreement. Pacira shall provide Master Distributorwith notice of any cancellation of such policy of insurance4.COMPENSATION4.01Pacira shall pay to Master Distributor as its entire compensation [**] as set forth and described in Exhibit C attached hereto.5.SELLING TERMS5.01Subject to the provisions of this Agreement, the Product promoted by Master Distributor shall be sold or offered for sale onlyat prices and upon the terms fixed by Pacira. All orders and contracts for the purchase of the Product shall be processed byPacira through its established distribution systems. For the avoidance of doubt, Pacira shall book all sales of the Product in theTerritory and shall be responsible for the pricing of the Product (including, the timing of pricing changes) and any discountingshall be at Pacira’s sole discretion. Nothing in this Section 5.01 shall be construed to limit Pacira’s ability to set prices for theProduct or engage in such pricing strategies as it considers appropriate under the circumstances. Pacira shall timely adviseMaster Distributor of any Product price changes.5.02All orders and contracts for the purchase of the Product are subject to acceptance or rejection by Pacira and not binding untilsuch acceptance by Pacira. Pacira reserves the right to refuse any business originated by Master Distributor in the Territoryfor any reason which in the judgment of Pacira is sufficient grounds for refusal, and Master Distributor shall not be entitledto any commission thereon.- 6-5.03Master Distributor shall not acquire Product from Pacira. Title to the Product sold by Master Distributor hereunder shall passdirectly from Pacira to the customer and shall not pass to Master Distributor.6.CONFIDENTIALITY AND NONCOMPETITION COVENANT6.01Pacira may, and the parties expect that it will, provide Proprietary Information to Master Distributor. Master Distributoragrees, and will require each of its Sub-Distributors to agree, that it, or such Sub-Distributor, as the case may be, will holdconfidential and will not disclose, make known, divulge or communicate Proprietary Information to third parties and will notuse Proprietary Information, except in furtherance of and pursuant to this Agreement. The term “Proprietary Information”,as that term is used herein, shall mean all drawings, designs, specifications, technical and manufacturing data, quality andperformance standards, customer lists, and pricing strategies of Pacira, whether conveyed verbally or in writing. ProprietaryInformation does not include, and the restrictions related thereto shall not apply to, information in the public domain prior tothe date of disclosure. Upon termination of this Agreement, Master Distributor shall surrender to Pacira all ProprietaryInformation of Pacira in the possession of Master Distributor and its Sub-Distributors.6.02Master Distributor covenants and agrees, and will require each of its Sub-Distributors to covenant and agree, that, during theterm of this Agreement it, or such Sub-Distributor, as the case may be, will not, without the express written consent ofPacira: (a) promote, sell or distribute any products of any other person, corporation or other entity which are in competitionwith the Product it is representing hereunder, (b) act as a distributor or agent for any other person, corporation, or other entitywith respect to products which are in competition with the Product it is representing hereunder or (c) intentionally promotethe Product to any Carved Out Accounts as defined on Exhibit A. The foregoing limitation shall apply to products deliveredto, or performed in, the Territory. Notwithstanding the prohibition contained in Section 6.02(c) above, nothing herein shallprevent Master Distributor from promoting products which would not otherwise violate the prohibitions contained inSections 6.02 (a) or 6.02(b) to Carved Out Accounts.6.03Master Distributor agrees that damages may be difficult to calculate and specifically agrees that the provisions of this sectionmay be enforced by injunctive relief; provided, however, nothing herein shall be construed as prohibiting Pacira frompursuing any other remedies available to it for breach, including the recovery of damages.7.TRADEMARKS7.01Pacira hereby grants to Master Distributor and each of its Sub-Distributors, a non-exclusive right and nontransferable rightand license, without the right to grant sublicenses to any party, to use the trademarks and trade names of Pacira (the“Trademarks”) during the Term of this Agreement in connection with the promotion and advertising of the Product and thesolicitation of orders for the Product in the Territory, provided that (a) Master Distributor submits to Pacira for its priorwritten approval examples of any- 7-and all materials, promotional literature, advertising and technical narrative in which any Trademark is used, and (b) theTrademarks shall be used by Master Distributor in accordance with Pacira’s standards, specifications and instructions. MasterDistributor shall acquire no right, title or interest in the Trademarks other than the foregoing limited license, and MasterDistributor shall not use any Trademarks, or words, phrases or symbols confusingly similar to any Trademarks, as part ofMaster Distributor’s corporate or trade name or permit any third party to do so without the prior written consent of Pacira.Master Distributor agrees that all of its uses of the Trademarks shall inure to the benefit of Pacira.7.02Master Distributor shall promptly notify Pacira of any use by any third party of the Trademarks or any use by such thirdparties of similar marks which may constitute an infringement or passing off of the Trademarks. Pacira reserves the right, inits sole discretion, to institute any proceedings against such third party infringers and Master Distributor shall refrain fromdoing so. Master Distributor agrees to cooperate fully with Pacira in any action taken by Pacira against such third parties,provided that all expenses of such action shall be borne by Pacira and all damages which may be awarded or agreed upon insettlement of such action shall accrue to Pacira.7.03Upon the termination or expiration of this Agreement, Master Distributor shall cease and desist, and cause each of its Sub-Distributors to cease and desist, from the use of the Trademarks in any manner, including but not limited to any use inconnection with Master Distributor’s corporate or trade name. In addition, Master Distributor hereby empowers Pacira andagrees to assist Pacira, if requested, to cancel, revoke or withdraw any governmental registration or authorization permittingMaster Distributor to use the Trademarks.8.TERM AND TERMINATION8.01The term of this Agreement (the “Term”) shall be for an initial period of six (6) months (the “Pilot Period”), commencingApril 1, 2013 and ending September 30, 2013. Upon expiration of the Pilot Period, this Agreement shall automaticallycontinue for an additional term of five (5) years, commencing October 1, 2013 and ending September 30, 2018 (suchadditional five (5) year period hereinafter referred to as the “Subsequent Period”), unless either party elects to terminate thisAgreement by delivering notice to the other party within fifteen (15) days prior to expiration of the Pilot Period.8.02This Agreement may be terminated at any time during the Term as follows (the effective date of any such terminationreferred to herein as the “Termination Date”):(a)by the non-breaching Party, in the event of a material breach by either Party, which breach (if capable of beingcured) remains uncured within [**] of written notice of such breach;- 8-(b)by either Party effective immediately upon written notice if any representation or warranty made herein by theother Party proves to be materially false and/or misleading when made;(c)by either Party effective immediately if toxicity or safety findings or side effects of the Product actually causesthe discontinuation of the commercialization of the Product;(d)by either Party effective immediately upon written notice if the Product is withdrawn from the market for anyreason (other than due to any act or omission of the terminating Party or any of its subsidiaries, or any of theirrespective employees, agents or representatives);(e)by either Party effective immediately upon written notice in the event (i) a court of competent jurisdictionenters a decree or order of relief appointing a receiver, liquidator, assignee, trustee or similar official of the otherParty or any substantial part of its assets and such decree or order is consented to by the other Party or continuesunstayed and in effect for a period of [**], (ii) the other Party files a voluntary petition or acquiesces in or failsto contest an involuntary petition under any bankruptcy, insolvency or similar law, (iii) an insolvency petition isfiled against the other Party under any bankruptcy, insolvency or similar law which is not dismissed within [**],or (iv) the other Party makes a general assignment for the benefit of its creditors; and(f)upon the mutual written agreement of the Parties.8.03In addition to those termination rights set forth in Section 8.02, Pacira may terminate this Agreement upon the occurrence ofany of the following:(a)actual or threatened material regulatory or other action by the FDA or any other Governmental Authorityrelating to the Product;(b)Pacira is enjoined, prohibited or restricted from granting Master Distributor the rights granted to it by Pacirahereunder, in any such case, pursuant to a final, non-appealable award, judgment, decree or other order of anycourt or other Governmental Authority; provided that such injunction, prohibition or restriction does not resultfrom any action or inaction of or caused by Pacira or any of its subsidiaries, or any of their respective employees,agents or representatives;(c)Master Distributor is enjoined, prohibited or restricted from Promoting the Product in the Territory inaccordance with the terms hereof; provided that such injunction, prohibition or restriction does not result fromany action or inaction of or caused by Pacira or any of its subsidiaries, or any of their respective employees,agents or representatives;- 9-(d)In the event that Master Distributor fails to meet the Minimum Annual Performance Goal for any of theMeasurement Periods set forth on Exhibit B unless such failure is reasonably attributable to the inability ofPacira to provide sufficient quantities of Product to Master Distributor’s customers in the Territory during theapplicable Measurement Period.(e)Voluntary abandonment of the business by Master Distributor as determined by a totality of the circumstances;(f)Conviction or a plea of guilty or no contest to a felony charge of violating any law relating to MasterDistributor’s business;(g)Any act of Master Distributor which materially impairs the goodwill associated with Pacira’s name, trademark,trade name, service mark, logotype, or other commercial symbol;(h)Any material change of senior management, sales personnel or ownership of Master Distributor which in thereasonable opinion of Pacira adversely impacts the performance of Master Distributor’s obligations hereunder;or(i)Failure of Master Distributor to materially comply with Pacira’s sales policies and procedures, as provided toMaster Distributor in writing; provided, however, this right of Pacira to terminate the Agreement shall onlyapply if Master Distributor does not cure such failure within [**] following notice thereof from Pacira.8.04Pacira shall have the right to terminate this Agreement without cause effective September 30, 2016 provided that Paciradelivers written notice of such election to terminate on or before [**].8.05Notice of termination of this Agreement, or election not to renew, shall be in writing and shall be sent to the other party:If to Pacira: Pacira Pharmaceuticals, Inc.5 Sylvan WayParsippany, NJ 07054Attn: David Stack, President and CEOWith a copy to:Pacira Pharmaceuticals, Inc.5 Sylvan WayParsippany, NJ 07054Attn: Kristen Williams, Corporate Counsel- 10-If to Master Distributor: Crosslink BioScience, LLC3300 NE ExpresswayBuilding 7Atlanta, GA 30341Attn: Thomas Fleetwood and Gordon FordWith a copy to:Richard L. Haury, Jr., Esq.Sr. VP/General CounselMaster Distributor Life Sciences, LLC3300 Northeast ExpresswayBuilding 7Atlanta, GA 30341or to such other address as may be specified in a notice similarly sent. All notices shall be deemed given when received.8.06Upon termination of this Agreement all promotional material, sales bulletins, advertising literature and other writteninformation relating to the Product in possession of Master Distributor and any Sub-Distributor shall at such time be returnedto Pacira.8.07[**]8.08Upon the expiration or termination of this Agreement, each Party shall (i) return to the other Party all ConfidentialInformation of the other Party that is in its possession; (ii) Master Distributor shall cease the promotion of the Product andreturn all Promotional Materials to Pacira; (iii) Pacira shall pay to Master Distributor any Performance based Payments earnedup throughout the date of termination or expiration and (iv) the mutual rights and obligations of the Parties hereunder shallforthwith terminate; provided however, that the provisions of Sections 2.06, 2.07, 2.08, 2.12, 2.13, 2.15, 3.03,3.04, 4.01,6,7.03,8.06,8.07,8.08, 11.01,11.02,11.08,11.09, 11.10 and Exhibit C shall survive any such expiration or termination of thisAgreement as necessary to give full force and effect hereto or thereto, and such termination or expiration shall not terminateor otherwise affect any right or obligation accruing hereunder prior to such expiration or termination, or accruing thereafterin respect of any event occurring prior thereto.9.REPRESENTATIONS AND WARRANTIES; COVENANTS9.01Each Party hereby represents and warrants to the other Party as follows:9.01.2Such Party has all requisite corporate or company power and authority to enter into this Agreement and toperform the services contemplated hereunder (including, in the case of Master Distributor, the promotion of theProduct hereunder).- 11-9.01.3All actions on the part of such Party, the board of directors or managers of such Party and the equity holders ormembers of such Party necessary for (i) the authorization, execution, delivery and performance by such Party ofthis Agreement, and (ii) the consummation of the transactions contemplated hereby, having been duly taken. ThisAgreement is legally valid and binding obligations of such Party, enforceable against such Party in accordance withits terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency,reorganization, moratorium, or similar laws affecting the enforcement of creditors’ rights generally and exceptthat the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretionof the court before which any proceeding may be brought).9.01.4None of the execution and delivery of this Agreement, the consummation of the transactions provided for hereinor contemplated hereby, or the fulfillment by such Party of the terms hereof or thereof, will (with or withoutnotice or passage of time or both): (i) conflict with or result in a breach of any provision of the certificate ofincorporation, by-laws, operating agreement or other governing documents of such Party, (ii) result in a default,constitute a default under, give rise to any right of termination, cancellation or acceleration, or require anyconsent or approval (other than approvals that have been obtained) under any of the terms, conditions, or provisionof any material note, bond, mortgage, indenture, loan, arrangement, license, agreement, lease or otherinstrument or obligation to which such Party is a party or by which its assets may be bound, or (iii) violate any lawor regulation applicable to such part or any of its assets.9.01.5There is no action, suit, proceeding or investigation pending or, to such Party’s knowledge, currently threatened,against such Party that questions the validity of this Agreement or the right of such Party to enter into thisAgreement, or to consummate the transactions contemplated hereby, nor does such Party have knowledge thatthere is any basis for the foregoing. Such Party is not a Party or subject to the provisions of any order, writ,injunction, judgment or decree of any Governmental Authority, which would adversely affect its rights orobligations hereunder or the transactions contemplated hereby. All consents, approvals, qualifications, orders orauthorizations of, filings with, or notices to any Governmental Authority or any other third party required inconnection with (i) such Party’s valid execution, delivery or performance of this Agreement, and (ii) theconsummation of any other transaction contemplated on the part of such Party hereby have been obtained, madeor given.9.01.6Such Party is not in violation of any law or regulation, which violation could reasonably be expected to affect suchParty’s performance of its obligations hereunder, and, without limiting the generality of the foregoing, such Partyholds each of the licenses, permits, approvals or authorizations necessary with respect to its current business andoperations (and its right and obligations- 12-contemplated hereby) in compliance with all laws and regulations except where the absence thereof does notmaterially impact the ability of such Party to perform its obligations hereunder.9.01.7Such Party has not retained any finder, broker, agent, financial advisor or other intermediary in connection withthe transactions contemplated by this Agreement.9.02In addition to those representations and warranties of Master Distributor set forth above, Master Distributor furtherrepresents, warrants and covenants to Pacira as follows:9.02.2Master Distributor has, and will at all times during the term of this Agreement have, in all material respects, therequisite expertise, experience and skill to Promote the Product and that it shall cause the services to beperformed hereunder by all affiliates, employees and/or agents or Sub-Distributors of Master Distributor to beperformed, in all material respects, in a competent, efficient and professional manner.9.02.3Neither Master Distributor nor any person employed or retained by Master Distributor or any Sub Distributor inconnection with any work to be performed for or on behalf of Pacira has been debarred under Section 306(a) or(b) of the Food Drug and Cosmetic Act, 21 U.S.C.§ 301 et seq. as it may be amended from time to time and nodebarred person will in the future be employed by Master Distributor or any Sub Distributor in connection withany work to be performed for or on behalf of Pacira. If at any time after execution of this Agreement, MasterDistributor becomes aware that Master Distributor or any person employed by Master Distributor or any SubDistributor in connection with any work to be performed for or on behalf of Pacira shall become or shall be in theprocess of being debarred, Master Distributor hereby agrees to so notify Pacira immediately in writing andimmediately take steps to prevent such person from performing any of the services contemplated by thisAgreement, it being understood that if appropriate and prompt disciplinary action is taken and there is no materialadverse effect on Pacira or its operations as a result of such person’s actions, then Master Distributor shall bedeemed to have cured any potential breach of this Agreement caused by such person’s actions.9.03EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NO PARTY MAKES ANY OTHERREPRESENTATIONS OR WARRANTIES, INCLUDING FITNESS FOR PURPOSE INTENDED ORMERCHANTABILITY, WHETHER EXPRESS OR IMPLIED.9.04The representations and warranties of each Party set forth in this Section 9 shall survive until the expiration of the Term.10.DISPUTES- 13-10.01The Parties recognize that a bona fide dispute as to certain matters may from time to time arise during the Term that relates toeither Party’s rights and/or obligations hereunder. In the event of the occurrence of such a dispute, either Party may, bywritten notice to the other Party, have such dispute referred to their respective senior officials designated below or theirsuccessors, for attempted resolution by good faith negotiations within [**] after such notice is received. Said designated seniorofficials are as follows:For Master Distributor: Chief Executive Officer, or its designeeFor Pacira: Chief Executive Officer, or its designeeIn the event the designated senior officials are not able to resolve such dispute within the [**] period, either Party may invokethe provisions of Section 10.02. Failure to invoke Section 10.02 may cause the Agreement to be subject to an assertion of termination.10.02Subject to Section 10.1, any dispute, controversy or claim initiated by either Party arising out of, resulting from or relating tothis Agreement, or the performance by either Party of its obligations under this Agreement (other than bona fide Third Partyactions or proceedings filed or instituted in an action or proceeding by a Third Party against a Party), whether before or aftertermination of this Agreement, shall be finally resolved by binding arbitration. Whenever a Party shall decide to institutearbitration proceedings, it shall give written notice to that effect to the other Party. Any such arbitration shall be conductedunder the Commercial Arbitration Rules of the American Arbitration Association by a panel of three arbitrators appointed inaccordance with such rules with the arbitration taking place in New Jersey. The method and manner of discovery in any sucharbitration proceeding shall be governed by the laws of the State of New Jersey. The arbitrators shall have the authority togrant injunctions and/or specific performance and to allocate between the parties the costs of arbitration in such equitablemanner as they determine. Judgment upon the award so rendered may be entered in any court having jurisdiction orapplication may be made to such court for judicial acceptance of any award and an order of enforcement, as the case may be.In no event shall a demand for arbitration be made after the date when institution of a legal or equitable proceeding based uponsuch claim, dispute or other matter in question would be barred by the applicable statute of limitations. Notwithstanding theforegoing, either Party shall have the right, without waiving any right or remedy available to such Party under thisAgreement or otherwise, to seek and obtain from any court of competent jurisdiction any interim or provisional relief that isnecessary or desirable to protect the rights or property of such Party, pending the selection of the arbitrators hereunder orpending the arbitrators’ determination of any dispute, controversy or claim hereunder.11.GENERAL PROVISIONS11.01The failure of either party to exercise any of the provisions of this Agreement shall not be construed as a waiver of suchprovisions, at any future time, during the Term of this Agreement.- 14-11.02This Agreement shall be binding upon the parties hereto and their respective representatives, heirs, successors and assigns.11.03It is expressly recognized by Pacira and Master Distributor that this Agreement is based upon Pacira’s reliance on seniormanagement of Master Distributor and, therefore, this Agreement may not be assigned or transferred without prior writtenapproval of Pacira. Any change of control or merger of Master Distributor shall constitute an assignment for purposes of thisSection 11.03. Notwithstanding the foregoing and except as otherwise stated in Section 2.02, Master Distributor may engagethe services of independent contractors to promote the sale of Product with respect to portions of the Territory, but only aftereach such independent contractor has been presented to Pacira for approval, which approval shall not be unreasonablywithheld.11.04THIS AGREEMENT, INCLUDING EXHIBITS A, B AND C ATTACHED HERETO AND INCORPORATEDHEREIN AS AN INTEGRAL PART OF THIS AGREEMENT, CONSTITUTES THE ENTIRE AGREEMENT OFTHE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND SUPERSEDES ALL PREVIOUSAGREEMENTS BY AND BETWEEN PACIRA AND MASTER DISTRIBUTOR AS WELL AS ALL PROPOSALS,ORAL OR WRITTEN, AND ALL NEGOTIATIONS, CONVERSATIONS OR DISCUSSIONS HERETOFORE HADBETWEEN THE PARTIES RELATED TO THIS AGREEMENT. MASTER DISTRIBUTOR ACKNOWLEDGESTHAT IT HAS NOT BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY ANY REPRESENTATIONS ORSTATEMENTS, ORAL OR WRITTEN, NOT EXPRESSLY CONTAINED HEREIN.11.05No modification of this Agreement shall be binding on either party unless it is in writing and signed by both parties.11.06No liability shall result from delay in performance or nonperformance caused by Force Majeure or circumstances beyond thereasonable control of the party affected, including, but not limited to, acts of God, fire, flood, war, embargo, terrorism, anyUnited States government regulation, director or request, accident, labor trouble or shortage thereof or inability to obtainmaterial equipment or transport.11.07Neither Party may publicly disclose the existence or terms or any other matter of fact regarding this Agreement and anyancillary agreements without the prior written consent of the other Party, which consent shall not be unreasonably withheldor delayed; provided, however, that either Party may make such a disclosure and provide a copy of this Agreement and anyancillary agreements to the extent required by applicable Law or by the requirements of any nationally recognized securitiesexchange, quotation system or over-the-counter market on which such Party has its securities listed or traded. In the eventthat such disclosure is required as aforesaid, the disclosing Party shall make reasonable efforts to provide the other Party withnotice beforehand and to coordinate with the other Party with respect to the wording and timing of any such disclosure.Notwithstanding the foregoing, either Party may disclose to a third party the existence or terms or any other matter of factregarding this Agreement and any ancillary agreements- 15-and provide a copy of this Agreement and any ancillary agreements without the prior written consent of the other Party: (i)pursuant to, and in accordance with, any existing contractual obligations with such party or (ii) if such Third Party is aninvestor or a prospective investor, purchaser, partner, lender, or other potential financing source, Sub-Distributor or potentialSub-Distributor (or a representative of any of the foregoing) who is obligated in writing to keep such information confidential.11.08The parties intend that this Agreement be construed consistently with the laws of the State of New Jersey. If there is aprovision herein which is invalid under applicable law or inconsistent with applicable law, it shall either not be enforced orshall be enforced as if amended so as to be consistent with applicable law; but the remainder of the Agreement shall be fullyenforceable as written. All disputes shall be resolved in accordance with New Jersey State law.11.09The Parties do not intend this Agreement to create any third party beneficiaries.11.10Neither Pacira nor Master Distributor (which for the purposes of this Section 11 shall include their respective affiliates,directors, managers, officers, employees, consultants, equity holders, representatives and agents) shall have any liability tothe other for any punitive damages, special, incidental, consequential or indirect damages, relating to or arising from the lossof commercial or business opportunity, revenue or profit, in connection with or arising out of this Agreement, even if suchdamages may have been foreseeable; provided that such limitation shall not apply in the case of (a) fraud, (b) intentionalmisconduct and (c) any damages (including, without limitation, the types enumerated in this Section 11.10) claimed by orpaid to a third party in connection with a third party claim.11.11This Agreement may be executed in any number of counterparts each of which will be deemed an original and all of whichtaken together will be deemed to constitute one and the same instrument.IN WITNESS WHEREOF, the parties hereto have hereunto signed this Agreement, effective as of the EffectiveDate. PACIRA PHARMACEUTICALS, INC. By: /s/ David Stack Its: President, CEO - 16-Date: March 11, 2013 CROSSLINK BIOSCIENCE, LLCBy: /s/ Thomas Fleetwood Its: President Date: March 11, 2013 - 17-EXHIBIT ATHE TERRITORYThe Territory during the Pilot Period shall consist of those geographic regions in the United States as agreed to by Master Distributor andPacira and those target accounts in such geographic regions which agreed upon target accounts shall be set forth on a list prepared byMaster Distributor. Master Distributor shall focus its initial selling efforts on such target accounts. During the Pilot Period, the partiesshall also discuss and agree on the number of Sub Distributors in certain regional markets recommended by the Master Distributor.Master Distributor and Pacira may expand this list of Master Distributor target accounts and Sub Distributors at any time.Attached hereto as Schedule A-1 is a list of Pacira’s “Carved-Out Accounts” that are assigned under contract to third parties other thanthe Master Distributor as of the Effective Date. Carved Out Accounts shall also include [**]. During the Pilot Period, MasterDistributor shall not promote the Product to any of the Carved Out Accounts set forth on Schedule A-1 and no Performance BasedPayments will be paid to Master Distributor for any sales to a Carved Out Account.In the event this Agreement is not terminated by Pacira as provided in Section 8.01, during the Subsequent Period, the Territory shall bethe United States of America. Within [**] following the expiration of the Pilot Period, the parties will meet and review the performanceof Master Distributor or any Sub Distributors during the Pilot Period on a territory by territory basis and thereafter agree on the businessplan and operational role out of additional Sub Distributors in the Territory for the first year of the Subsequent Period (10/1/13 –9/30/14). Thereafter, Master Distributor and Pacira shall schedule [**] meetings to discuss the ongoing promotion of the Product andagree on the Master Distributor target list within the Territory so as to align resources to maximize the sales of Product in the Territory..Master Distributor shall not promote the Product to any Carved Out Accounts set forth on Schedule A-1 and no Performance BasedPayments will be paid to Master Distributor for any sales to such Carved Out Accounts. EXHIBIT A -1SCHEDULE A-1CARVED OUT ACCOUNTS*[**][**]SCHEDULE A-1 - 1 -EXHIBIT BPERFORMANCE GOALS(QUOTAS)Annual Territory Minimum and [**] (quotas) for orthopedic and spine surgeries, expressed in total net sales of the Product and boxesduring [**] following the Pilot Period are scheduled below. Achievement is based upon [**] in the given measurement period:Measurement PeriodMinimum Performance Goal[**][**][**][**][**][**][**][**][**][**]The above box configuration being [**] vials. The vial size is [**].Note that in calculating achievement of the above quotas, Master Distributor shall receive [**] for all boxes of Product for which aPerformance Based Payment was made.EXHIBIT B -1-EXHIBIT CPERFORMANCE BASED PAYMENTSMaster Distributor shall be entitled to be paid Performance Based Payments for sale of the Product in the Territory as follows:1. Master Distributor shall be entitled to a Performance Based Payment and Pacira shall pay such Performance Based Payments for allreported orthopedic and spine surgery uses of Product in the Territory on or after April 1, 2013.2. The Performance Based Payment shall be [**] for each box of Product. The current selling configuration is [**] vials to a box. Thevial size is [**].(a) Master Distributor shall report to Pacira by the [**] following the end of [**],[**] actual documented usage in vials bytarget account in the Territory for orthopedic and spine surgeries (the “[**] Report”). The [**] Report shall contain the date of use,name of surgeon, type of surgery, vials used and Product Lot # (if available). For the purposes of calculating the Performance BasedPayments, vials will be converted to boxes by Pacira. If the number of total Product vials in a box changes during the Term of thisAgreement, the above calculation for Performance Based Payments shall be proportionally adjusted to reflect such change, effective asof the date of such change.(b) During the Pilot Period for the purposes of calculating the Performance Based Payment amount, Pacira shall increase thereported actual documented vial usage by [**] as a “Usage Adjustment Factor” to capture by account any additional estimated usage ofvials of Product resulting from the Master Distributor’s selling efforts. By way of example, [**]. On a [**] basis, Pacira has the right,but not the obligation, to modify the “Usage Adjustment Factor” (but not below [**] of actual usage), on an account by account basis,based on prior period capture rates. For example, [**]. For the avoidance of doubt, the “Usage Adjustment Factor” may be modified, byaccount, and by [**], at the sole discretion of Pacira, provided only that the “Usage Adjustment Factor” represents Pacira’s good faitheffort to estimate actual sales resulting from Master Distributor selling efforts and in no event shall the Usage Adjustment Factor for anaccount fall below [**].(c) Within [**] of the end of the Pilot Period the Parties shall agree on the “Usage Adjustment Factor” for the next preceding[**]. Thereafter the Usage Adjustment Factor shall be determined on a [**] basis by the [**] reviews and adjustments as agreed willcontinue for [**] of the Subsequent Period [**]. Thereafter the Usage Adjustment Factor shall be adjusted [**] for the balance of theAgreement with the review and adjustment agreed by the [**]. For purposes of developing each Subsequent Period’s Usage AdjustmentFactor, the Parties shall review, evaluate and discuss all actual sales of Product in the Territory.(d) Master Distributor shall not be entitled to any Performance Based Payments for any sales in the Territory to Carved-OutAccounts.Exhibit C -1-(e) [**].(f) in the event Pacira implements a sales price increase for a box of Product, the above Performance Based Payments per box[**] shall be increased by the same percentage increase in the sales price, effective as of the date of such sales price increase.(g) in the event Pacira introduces an alternative selling configuration (such as changing the number of vials in a box or the sizeof the vial from [**]) (an “Alternative Product Configuration”), Pacira shall notify Master Distributor of the introduction of theAlternative Product Configuration and the pricing for such Alternative Product Configuration. In such event, the Performance BasedPayment shall be adjusted to provide Master Distributor with the same proportionate share of the net selling price of the AlternativeProduct Configuration as currently being paid to Master Distributor for sales of Product hereunder. [**].3. Upon notice to the Master Distributor, Pacira shall have the right to audit all uses of the Product reported by the Master Distributorduring the Term. Master Distributor shall make available all records and documents requested by Pacira in order to enable thecompletion of the audit. If the results of such audit indicates any overpayment to the Master Distributor such overpayment shall bepromptly refunded by the Master Distributor. If the results of such audit indicates an underpayment such underpayment shall promptlybe paid to the Master Distributor4.Performance Based Payments earned shall be paid [**] to the Master Distributor as follows:(a) Master Distributor will submit the [**] Report to Pacira. Pacira shall promptly report back to Master Distributor if in anysituation the account usage of vials as reported exceeds purchases by the account (after taking into account any inventory of Product thatsuch account may have previously had on hand during such [**] reporting period). In such an occurrence Pacira shall reduce suchreported amounts for this account only to no more than what has been ordered by such account in the period.(b) Within [**] for which the Performance Based Payments are earned, Pacira shall pay to Master Distributor, [**], thePerformance Based Payments so calculated and follow up with all backup supporting the calculations.5.If this Agreement is terminated, Pacira shall pay Master Distributor all Performance Based Payments to which MasterDistributor is entitled hereunder by reason of sales made prior to the Termination Date.6.A “sale” made prior to the Termination Date means a binding contract created by a specific offer to purchase, which has beenaccepted by Pacira by the actual shipment of Product prior to the Termination Date. Pacira, from time to time, enters into supplyagreements which call for issuance of blanket purchase orders or otherwise contemplate Pacira supplying Product, but which donot obligate the purchaser to purchase any particular Product or guaranty of Products and which does not release Product fordelivery. Such agreements even if entered into prior to the Termination Date or prior to the end of the notification periodEXHIBIT C -2-do not constitute sales made prior to the Termination Date for purposes of determining the amount of the Performance BasedPayment.EXHIBIT C -3-CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF THIS EXHIBIT. THE REDACTIONS AREINDICATED WITH “[**]”. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED WITH THE U.S. SECURITIES AND EXCHANGECOMMISSION.FIRST AMENDMENT TO MASTER DISTRIBUTOR AGREEMENTThis First Amendment to Master Distributor Agreement (this “Amendment”), is effective as of April 1st, 2013, by and amongPacira Pharmaceuticals, Inc., a California corporation (“Pacira”) and CrossLink BioScience, LLC, a Georgia limited liability company(“Master Distributor”)( Individually the “Party”, collectively the “Parties”).RECITALSWHEREAS, Pacira and Master Distributor are parties to a Master Distributor Agreement dated April 1, 2013 (the“Agreement”) pursuant to which Master Distributor has been providing services to Pacira on the terms and conditions set forth in theAgreement; andWHEREAS, Pacira and Master Distributor wish to amend certain terms of the Agreement;NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and Agreements madeherein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Partieshereto agree as follows:1.Definitions. Capitalized terms used but not defined herein shall have the respective meanings given to suchitems in the Agreement.2.Amendment to Section 2.01. Section 2.01 of the Agreement is hereby amended by deleting the date ofOctober 1, 2014 in the second sentence and substituting the following date in lieu thereof:“October 1, 2013”3.Amendment to Exhibit A and Schedule A-1. The Agreement shall be amended by deleting Exhibit A andSchedule A-1 in their entirety and replacing them with a new Exhibit A and Schedule A-1 attached hereto as “FirstAmendment to Master Distributor Agreement- Exhibit A and Schedule A-1.”4. Amendment to Section 2.01. Section of the 2.01 of the Agreement is amended by deleting the language in Section2.01(ii) and replacing it in its entirety with the following:“(ii) prepare an annual business and promotion plan for discussion, review, coordination and approval by Pacira [**] prior to thestart of each annual period commencing October 1, 2014”All other provisions of Section 2.01 shall remain unchanged and in full force and effect.5. Amendment to Section 2.02. Section 2.02 of the Agreement is hereby amended by adding the following additionallanguage after the second sentence in section 2.02“Prior to Master Distributor executing any such contracts with Sub-Distributors Master Distributor, shall obtain Pacira’sapproval of such contracts in writing. Further, Master Distributor shall advise Pacira of any proposed amendments to any executedcontracts between Master Distributor and Sub-Distributor and shall not agree to any such amendments without receiving Pacira’sexpress written consent. Master Distributorshall not consent to any obligations requiring consent or approval under the contracts between Master Distributor and Sub-Distributors,that require Pacira’s consent or approval without first obtaining Pacira’s express written consent including, but not limited to thefollowing: (i) preparation of semi-annual business and promotion plans between the Master Distributor and any Sub-Distributors; (ii)utilization of the services of any independent contractors, distributors or agents not previously approved by Pacira; (iii) assignment ortransfer of an existing executed agreement between Master Distributor and a Sub-Distributor; (iv) overriding any limitations imposedupon a Sub-Distributor or a Sub-Distributor representative to (a) promote, sell or distribute any products of any other person,corporation or entity which are in competition with the Product, (b) act as a distributor or agent for any other person, corporation, orother entity with respect to products which are in competition with the Product, and (c) intentionally promoting the Product in anyCarved Out Geographies in the Territory; and (v) scheduling of quarterly meetings with Master Distributor and any Sub-Distributors.Section 2.02 of the Agreement is hereby further amended by adding the following additional language after the third sentence insection 2.02:“Master Distributor shall advise Pacira prior to termination of any contracts between Master Distributor and any Sub-Distributors.”All other provisions of Section 2.02 shall remain unchanged and in full force and effect.6. Amendment to Section 9.02.2. Section 9.02.2 of the Agreement is amended by adding the following newparagraph, all other provisions of Section 9.02.2 shall remain unchanged and in full force and effect:“Neither Master Distributor nor any person employed or retained by Master Distributor in connection with any work to beperformed for or on behalf of Pacira has been sanctioned by the Office of Inspector General (“OIG”) pursuant to Section 1128 of theSocial Security Act, as it may be amended from time to time, and listed as an Excluded Individual or Entity by the OIG and no ExcludedIndividual or Entity will in the future be employed by Master Distributor in connection with any work to be performed for or on behalfof Pacira. If at any time after execution of this Agreement, Master Distributor becomes aware that Master Distributor or any personemployed or retained by Master Distributor in connection with any work to be performed for or on behalf of Pacira shall become or shallbe in the process of being sanctioned and excluded, Master Distributor hereby agrees to so notify Pacira immediately in writing andimmediately take steps to prevent such person form performing any of the services contemplated by this Agreement.”7. Amendment to Section 11.03. Section 11.03 of the Agreement is hereby amended by adding the followingadditional language:“Master Distributor shall ensure that all CrossLink independent contractors performing services hereunder have been advisedof the Independent Contractor Obligations as set forth in new Exhibit D to the Agreement (attached hereto as “Second Amendment tothe Master Distributor Agreement-Exhibit D Independent Contractor Obligations”) and agrees to promote the Product in the Territory inaccordance with such obligations.8. Amendment to Section 11.4. Section 11.04 of this Agreement is amended by replacing it in its entirety the boldedand underlined language: “EXHIBITS A, B AND C” with the language set forth below:"EXHIBITS A, B, C AND D”.All other provisions of Section 11.04 shall remain unchanged and in full force and effect:9. No Other Amendments. Except as expressly amended hereby the Agreement shall continue in full force and effect.10. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of New Jerseywithout giving effect to the choice of law provisions thereof.11. Counterparts. For the convenience of the parties hereto, this Amendment may be executed in any number of counterparts,each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the sameAgreement.12. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and each oftheir successors and assigns, including, without limitation, any successors or surviving entities thereto by operation of merger.13. Entire Agreement. The Agreement, as amended hereby, constitutes the entire Agreement of all parties hereto withrespect to the subject matter hereof and supersedes all prior Agreements and undertakings, both written and oral, among the partieshereto with respect to the subject matter hereof. All references in the Agreement to “this Agreement”, “hereof”, “hereby” and wordsof similar import shall refer to the Agreement as amended hereby.[Remainder of Page Intentionally Left Blank]IN WITNESS WHEREOF, the parties hereto have entered into this First Amendment to Master Distributor Agreementeffective as of the date first above written.PACIRA PHARMACEUTICALS, INC.By: /s/ David Stack Name: David StackTitle: President, CEO CROSSLINK BIOSCIENCE, LLCBy: /s/ Gordon Ford Name: Gordon FordTitle:FIRST AMENDMENT TO MASTER DISTRIBUTOR AGREEMENTEXHIBIT ATHE TERRITORYThe Territory during the Pilot Period shall consist of those geographic regions in the United States as agreed to by the Master Distributorand Pacira and those target accounts in such geographic regions which agreed upon target accounts shall be set forth on a list prepared byMaster Distributor. Master Distributor shall focus its initial selling efforts on such target accounts. During the Pilot Period, the partiesshall also discuss and agree on the number of Sub-Distributors in certain regional markets recommended by the Master Distributor.Master Distributor and Pacira may expand the list of Master Distributor target accounts and Sub-Distributors at any time.Attached hereto as Schedule A-1 is a list of Pacira’s “Carved Out Geographies” in the Territory that are assigned under contract to thirdparties other than Master Distributor as of the Effective Date. Carved Out Geographies in the Territory shall also include [**]. Duringthe Pilot Period, Master Distributor shall not promote the Product to any of the Carved Out Geographies in the Territory set forth onSchedule A-1 and no Performance Based Payments will be paid to Master Distributor for any sales in the Carved Out Geographies.In the event this Agreement is not terminated by Pacira as provided in Section 8.01, during the Subsequent Period, the Territory shallbe the United States of America. Within [**] following expiration of the Pilot Period, the parties will meet and review the performanceof Master Distributor or any Sub-Distributors during the Pilot Period on a territory by territory basis and thereafter agree on thebusiness plan and operational role out of additional Sub- Distributors in the Territory for the first year of the Subsequent Period(10/1/13-9/30/14). Thereafter, Master Distributor and Pacira shall schedule [**] meetings to discuss the ongoing promotion of theProduct and agree on the Master Distributor target list within the Territory so as to align resources to maximize the sales of Product inthe Territory.Master Distributor shall not promote the Product in any Carved Out Geographies in the Territory set forth on Schedule A-1 attachedhereto and no Performance Based Payments will be paid to Master Distributor for any sales in such Craved Out Geographies in theTerritory.SCHEDULE A-1 “CARVED OUT GEOGRAPHIES”*[**][**]SECOND AMENDMENT TO MASTER DISTRIBUTOR AGREEMENTEXHIBIT D INDEPENDENT CONTRACTOR OBLIGATIONSIndependent Contractor (“IC”) will not utilize the services of any independent contractor or agent in performing your services withoutfirst obtaining the consent of CrossLink and Pacira. IC is a not an employee or agent of CrossLink or Pacira and have no authority to bindCrossLink or Pacira.IC will abide by all laws and maintain complete records relating to your promotion of the Product. IC will (a) limit claims of Productefficacy and safety to those which are consistent with Pacira’s then approved promotional materials and consistent with all legalrequirements, including FDA approved Product labeling, and (b) not delete or modify claims of efficacy and safety in the promotion ofthe Product so that they are different in any way from those contained in Pacira’s then approved promotional materials for the Productand the FDA approved Product labeling, or make any changes in promotional materials and literature provided by Pacira. In addition, ICwill comply with (i) the PhRMA Code on Interactions with Healthcare Professionals (ii) the American Medical Association Gifts toPhysicians From Industry Guidelines and (iii) Section 1128B(b) of the Social Security Act. In addition, IC will follow all policies andprocedures of CrossLink and Pacira applicable to Product sale and promotion. IC will ensure that he or she is able to maintain completerecords of its activities involving the promotion of the Product, including providing all documentation required under the PhysicianPayment Sunshine Act (“PPSA”).IC will not make any (i) false or misleading representations to customers or others regarding the Product and (ii) representations,warranties or guarantees with respect to the specifications, features or capabilities of the Product that are not consistent with theapplicable current FDA approved labeling, package insert or other documentation accompanying or describing the Product, includingPacira’s standard limited warranty and disclaimers. IC will not enlarge, modify or amend Pacira’s guarantees, warranties, prices or otherconditions of sales. IC will always clearly indicate in promotion and sale of the Product that the Product is that of Pacira.IC will forward any complaints, medical inquiries and/or drug information requests from consumers, physicians or other third partiesregarding the Product directly to Pacira within 48 hours of your receipt of such information. IC will not respond directly to anycomplaints, medical inquiries or drug information requests. In addition, IC will notify AMC and Pacira within 48 hours of any complaint,adverse reaction, injury or death that you become aware of, including name, contact information, product and lot number (if available)resulting from the use of the Product, and cooperate with CrossLink in preparing ant related reports.IC will promptly notify Pacira and CrossLink upon your being contacted by the FDA or any other Governmental Authority for anyregulatory purpose pertaining to the Product. IC shall not respond to the FDA or such other Governmental Authority before consultingwith Pacira, unless it is not practical or lawful to give Pacira and CrossLink advance notice.Unless CrossLink has the following insurance in place and lists IC as an additional insured under the policy, IC will maintain whilepromoting and selling the Product on behalf of CrossLink, Commercial General Liability insurance (excluding Products and CompletedOperations insurance) in an amount not less than [**] per occurrence and [**] annual aggregate coverage. Such insurance policy shallname CrossLink and Pacira as additional insureds, and IC will furnish CrossLink proof of such insurance. In addition, the policy shallprovide CrossLink with advance written notice prior to cancellation.IC agrees to follow all of Pacira’s sales representative training and certification programs, as required by Pacira. Prior to promoting theProduct for Crosslink, IC agrees to have the requisite expertise, experienceand skill to promote the Product and will do so in a competent, lawful, efficient and professional manner. IC agrees to accuratelydocument all information required under the law relating to the promotion of the Product, including the Physician Payment SunshineAct. In addition, IC agrees that it will not promote or sell the Product unless and until IC has satisfactorily completed all of Pacira’s salesrepresentative training and certification programs.IC understands that the Product shall be sold only at prices and terms fixed by Pacira, that all orders and contracts for the purchase of theProduct are subject to acceptance or rejection by Pacira and that Pacira reserves the right to reject any order or contract.IC acknowledges he or she may have access to certain Proprietary Information of CrossLink or Pacira. IC agrees to hold confidential andnot disclose, make known, divulge or communicate Proprietary Information to third parties and you will not use ProprietaryInformation, except in furtherance of and pursuant to your role with CrossLink. The term “Proprietary Information” shall mean alldrawings, designs, technical data, quality and performance standards, customer lists, and pricing strategies of Pacira, whether conveyedverbally or in writing. Proprietary Information does not include, and the restrictions related thereto shall not apply to, information in thepublic domain prior to the date of disclosure. Upon termination of IC’s engagement with CrossLink, IC shall surrender to CrossLink allProprietary Information of either Pacira or CrossLink in his or her possession.IC agrees that as long as he or she is engaged by CrossLink to promote the Product and for a period of [**] thereafter, IC will not,without the express written consent of CrossLink (which may not be granted without the express written consent of Pacira),promote,sell or distribute any products which are in competition with the Product. In addition, IC agrees that so long as he or she is engaged byCrossLink to promote the Product, IC will not intentionally promote the Product to any [**].IC acknowledges that CrossLink has obtained for itself and its authorized sales representatives (including you), a limited license to usethe trademarks and trade names (the “Trademarks”) of Pacira in connection with the promotion and sale of the Product. IC shall notacquire any interest in the Trademarks other than the foregoing limited license, and shall not use any Trademarks, or words or symbolsconfusingly similar to any Trademarks, as part of IC’s corporate or trade name. Upon the termination of CrossLink’s right to sell theProduct or your relationship with CrossLink, whichever occurs first, you will cease any further use of the Trademarks.IC has not been debarred under Section 306(a) or (b) of the Food Drug and Cosmetic Act, 21 U.S.C.§ 301 et seq. and, if IC becomesaware that he or she has been or is about to become debarred, IC agrees to immediately notify AMC, CrossLink and Pacira, and cease anyfurther promotion or sale of the Product. In addition, IC has not been sanctioned by the Office of Inspector General (“OIG”) pursuant toSection 1128 of the Social Security Act, and listed as an Excluded Individual or Entity by the OIG, and, if IC becomes aware that IC hasbeen or is about to become sanctioned and excluded, IC agrees to immediately notify CrossLink and Pacira and cease any furtherpromotion or sale of the Product.CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF THIS EXHIBIT. THE REDACTIONS AREINDICATED WITH “[**]”. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED WITH THE U.S. SECURITIES AND EXCHANGECOMMISSION.SECOND AMENDMENT TO MASTER DISTRIBUTOR AGREEMENTThis Second Amendment to Master Distributor Agreement (this “Amendment”), is effective as of September 5th, 2013(“Effective Date)”, by and among Pacira Pharmaceuticals, Inc., a California corporation (“Pacira”) and CrossLink BioScience, LLC, aGeorgia limited liability company (“Master Distributor”) ( individually the “Party”, collectively the “Parties”).RECITALSWHEREAS, Pacira and Master Distributor are parties to that certain Master Distributor Agreement effective as of April 1,2013, as amended by that certain First Amendment to Master Distributor Agreement effective as of April 1, 2013 (the “Agreement”)pursuant to which Master Distributor has been providing services to Pacira on the terms and conditions set forth in the Agreement; andWHEREAS, Pacira and Master Distributor wish to amend certain terms of the Agreement;NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and Agreements made herein andfor other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree asfollows:1.Definitions. Capitalized terms used but not defined herein shall have the respective meanings given to suchitems in the Agreement.2. Amendment to Section 8.03. Section 8.03 of the Agreement is hereby amended by adding the following additionallanguage:“(j) Master Distributor fails to maintain its marketing and distribution rights with [**]. Such termination shall be effective [**]from receipt of Pacira’s written notice of intent to terminate. In addition, Master Distributor has an affirmative duty hereunderto advise Pacira in writing immediately once it becomes aware of the termination or expiration of a Sub-Distributor’s marketingand distribution rights with its primary manufacturer [**] of medical devices utilized by orthopedic surgeons in the portion of theTerritory served by such Sub-Distributor. Upon execution of this Amendment, Master Distributor shall request each Sub-Distributor to sign an amendment to its Distributor Agreement allowing for the right of Master Distributor to terminate suchSub-Distributor in the event of such Sub-Distributor’s loss of marketing and distributions rights with its primary manufacturerand will notify Pacira immediately if any Sub-Distributor refuses to sign such amendment. Master Distributor shall providePacira a copy of the amendment to review prior to sending it to the Sub-Distributors. For those Sub-Distributors that sign theaforementioned amendment Pacira has the right to require Master Distributor to terminate its Distributor Agreement with suchSub-Distributors in accordance with the termination provision in the aforementioned amendment between the Sub-Distributorand Master Distributor.”All other provisions of Section 8.03 shall remain unchanged and in full force and effect.3. Amendment to Section 2.01. Sub clause (ii) of Section 2.01 of the Agreement is amended by deleting the languagein Section 2.01(ii) and replacing it in its entirety with the following:“prepare an annual business and promotion plan for discussion, review and coordination and approval of Pacira within [**] daysfrom the Effective Date of this Amendment for the first year of the Subsequent Period (10/1/13-9/30/14) and thereafter commencingOctober 1, 2014 annually for each year of the Subsequent Period [**] prior to the start of the annual period.”All other provisions of Section 2.01 shall remain unchanged and in full force and effect.4. Amendment to Exhibit A. Exhibit A is hereby amended by deleting the third paragraph thereof in its entirety andreplacing it with the following new paragraph:“In the event this Agreement is not terminated by Pacira as provided in Section 8.01, during the Subsequent Period, theTerritory shall be the United States of America. Following the expiration of the Pilot Period, thereafter, Master Distributor andPacira shall schedule [**] meetings to discuss the performance of Master Distributor and all Sub-Distributors on a territory byterritory basis and review the business plan and the ongoing promotion of the Product and target account list within the Territoryand approve the addition of any new Sub-Distributors for the subsequent [**] period.”All other provisions of Exhibit A shall remain unchanged and in full force and effect.5. Amendments to Exhibit B. Exhibit B is hereby amended by replacing the table in the Master Agreement in itsentirety with the following table:Measurement Period*Minimum Performance Goal[**][**][**][**][**][**][**][**][**][**]*“The Parties acknowledge that the current geographic area covered by Master Distributor and its Sub-Distributors as a percentage ofthe total market in the Territory for orthopaedic and spine surgeries (the “Coverage Ratio”) as of the date of this Amendment is [**].Accordingly, for purposes of establishing the foregoing Minimum [**], the Parties have assumed that the Coverage Ratio will remain at[**] for Measurement Period [**]. However, for Measurement Period [**] and Measurement Period [**], the Parties have assumedthat the Coverage Ratio will increase to [**] and [**], respectively, as a result of anticipated new Sub-Distributors to cover additionalgeography in the Territory. The Parties shall adjust the Minimum [**] for a Measurement Period if during such Measurement Periodthe actual Coverage Ratio is more or less than the foregoing assumed Coverage Ratios. In such cases the adjustment shall be [**] and theMinimum [**] for such Measurement Period will be [**] adjusted by the Parties. For purposes of example only, [**]. Any suchadjustments shall be subject to the mutual agreement of the Parties, who agree to work in good faith to determine the correct amount ofthe adjustment, and are only effective pursuant to a written amendment to the Agreement.”In addition, the last paragraph of Exhibit B is hereby deleted in its entirety and replaced with the following new paragraph:“Note that in calculating achievement of the Minimum [**], Master Distributor shall receive [**] for all boxes of Productreported on the [**] Report pursuant to Exhibit C, including without limitation any usage relating to the Pacira Baseline Accounts evenif no Performance Based Payment is made for such usage as set forth in Exhibit C.”All other provisions of Exhibit B shall remain unchanged and in full force and effect.6. Amendments to Exhibit C. Exhibit C is hereby amended by deleting paragraph 1 in its entirety and replacing itwith the following:“1. Master Distributor shall be entitled to a Performance Based Payment and Pacira shall pay such Performance Based Paymentsfor all orthopedic and spine surgery uses of Product in the Territory pursuant to paragraph 2(a) through 2(h) of Exhibit C.”Exhibit C is hereby further amended by deleting paragraphs 2 (b) and 2 (c) in their entirety and adding the following new paragraphs:“(b) Pacira shall verify each [**] Report submitted by the Master Distributor in support of Master Distributor’s request for aPerformance Based Payment. Pacira shall verify actual purchases, within the most recent [**] period including the current [**] period,based on its internal ordering system data, against the usage data set forth in the [**] Report. In the event the reported usage in the [**]Report exceeds the actual purchases of the Product for the [**] period including the current period, to the target accounts, Pacira shallreduce the reported usage in the [**] Report to no less than the actual amount purchased for the [**] period including the current periodby the target account (“Adjusted Usage”) and shall pay the Performance Based Payment based on the Adjusted Usage. The Partiesrecognize that there may be special circumstance relating to a target account in any given [**] period where Master Distributor can showmeaningful usage that is not being properly reflected in the Adjusted Usage for a target account by reason of the limitations imposed bythe foregoing [**] timetable. In such event, Pacira may permit, in its sole and absolute discretion and on a case-by-case basis, inclusionof such usage in the Adjusted Usage for such target account for such applicable [**] period.(c) For any specific target account reported in the [**] Report, for a Performance Based Payment where Pacira has no record of havingsold any Product to the target account Pacira will perform a timely investigation and report the results of any such investigation to theMaster Distributor. Thereafter, Pacira shall pay a Performance Based Payment to Master Distributor, if the investigation substantiatespurchases of the Product by the target account. Notwithstanding the foregoing, in the instances where Pacira has no record of having soldany Product to the target account and the actual usage reported in the [**] Report is [**] vials or less, Pacira shall not conduct anyinvestigation or make any adjustments to the reported amount and shall pay the Master Distributor the Performance Based Payment forthe amount reported for the target account in the [**] Report.(d) Effective October 1, 2013 for any target account specifically listed on the attached Exhibit C1 (“Pacira Baseline Accounts”) andrelating to the applicable [**] baseline of boxes, as set forth in Exhibit C1 (“Monthly Baseline Boxes”) for that target account, Pacirashall only pay a Performance Based Payment on [**]. Additional Pacira Baseline Accounts and applicable [**] Baseline Boxes may beadded in writing for each additional Sub-Distributor approved by the Parties after Oct 1, 2013.”Exhibit C is further amended by deleting paragraph 2(e) in its entirety and re-designating it as paragraph 2(f) with the following newlanguage:“(f) [**].”Exhibit C is further amended by re-designating the following sub-paragraphs as follows:“2(d) shall be re-designated as 2(e)2(f) shall be re-designated as 2(g)2(g) shall be re-designated as 2(h)”Exhibit C is further amended by deleting paragraph 4 (a) in its entirety and re-designating paragraph 4(b) as 4(a).All other provisions of Exhibit C shall remain unchanged and in full force and effect.7. Amendment to Exhibit D. Exhibit D is hereby amended by deleting the header “Second Amendment to MasterDistributer Agreement” and replacing it with the following header:“First Amendment to Master Distributor Agreement”All other provisions of Exhibit D shall remain unchanged and in full force and effect.8. No Other Amendments. Except as expressly amended hereby the Agreement as amended shall continue in fullforce and effect.9. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of NewJersey without giving effect to the choice of law provisions thereof.10. Counterparts. For the convenience of the Parties hereto, this Amendment may be executed in any number ofcounterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall togetherconstitute the same Agreement.11. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the Parties heretoand each of their successors and assigns, including, without limitation, any successors or surviving entities thereto by operationof merger.12. Entire Agreement. The Agreement, as amended hereby, constitutes the entire Agreement of all Parties heretowith respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, among theParties hereto with respect to the subject matter hereof. All references in the Agreement to “this Agreement”, “hereof”,“hereby” and words of similar import shall refer to the Agreement as amended hereby.[Remainder of Page Intentionally Left Blank]IN WITNESS WHEREOF, the Parties hereto have entered into this Second Amendment to Master Distributor Agreementeffective as of the date first above written.PACIRA PHARMACEUTICALS, INC.By: /s/ David Stack Name: David StackTitle: Chairman, CEO CROSSLINK BIOSCIENCE, LLCBy: /s/ Gordon Ford Name: Gordon FordTitle: CEO Exhibit C1 PACIRA BASELINE ACCOUNTS [**] EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Pacira Pharmaceuticals, Inc., a California corporation Pacira Ltd., company organized under the laws of the United KingdomExhibit 23.1Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in Registration Statement Nos. 333-175101 and 333-181986 on Form S-8 and Registration StatementNo. 333-180384 on Form S-3 of our report dated February 25, 2014, which report included an explanatory paragraph related to the Company's convertiblesenior notes, on our audits of the consolidated financial statements of Pacira Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2013 and 2012, andfor each of the three years in the period ended December 31, 2013 and our report on our audit of the effectiveness of internal control over financial reporting ofPacira Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2013, dated February 25, 2014, included in this Annual Report on Form 10-K of PaciraPharmaceuticals, Inc. for the year ended December 31, 2013./s/ CohnReznick LLPRoseland, New JerseyFebruary 25, 2014 QuickLinks -- Click here to rapidly navigate through this documentExhibit 31.1CERTIFICATIONI, David Stack, certify that:1. I have reviewed this annual report on Form 10-K of Pacira Pharmaceuticals, Inc. (the "Registrant");2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theRegistrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;(c)evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscalquarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the Registrant's internal control over financial reporting; and5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theRegistrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the Registrant's ability to record, process, summarize and report financial information; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control overfinancial reporting.Date:February 25, 2014/s/ DAVID STACKDavid Stack President, Chief Executive Officer and Chairman (Principal Executive Officer)QuickLinksExhibit 31.1CERTIFICATIONQuickLinks -- Click here to rapidly navigate through this documentExhibit 31.2CERTIFICATIONI, James Scibetta, certify that:1. I have reviewed this annual report on Form 10-K of Pacira Pharmaceuticals, Inc. (the "Registrant");2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theRegistrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;(c)evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscalquarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the Registrant's internal control over financial reporting; and5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theRegistrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the Registrant's ability to record, process, summarize and report financial information; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control overfinancial reporting.Date:February 25, 2014/s/ JAMES SCIBETTAJames ScibettaSenior Vice President and Chief Financial Officer(Principal Financial Officer)QuickLinksExhibit 31.2CERTIFICATIONQuickLinks -- Click here to rapidly navigate through this documentExhibit 32.1STATEMENT PURSUANT TO 18 U.S.C. §1350Pursuant to 18 U.S.C. §1350, the undersigned certifies that this Annual Report on Form 10-K of Pacira Pharmaceuticals, Inc. for the year endedDecember 31, 2013, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information containedin this report fairly presents, in all material respects, the financial condition and results of operations of Pacira Pharmaceuticals, Inc.Date:February 25, 2014/s/ DAVID STACKDavid Stack President, Chief Executive Officer and Chairman(Principal Executive Officer)QuickLinksExhibit 32.1STATEMENT PURSUANT TO 18 U.S.C. §1350QuickLinks -- Click here to rapidly navigate through this documentExhibit 32.2STATEMENT PURSUANT TO 18 U.S.C. §1350Pursuant to 18 U.S.C. §1350, the undersigned certifies that this Annual Report on Form 10-K of Pacira Pharmaceuticals, Inc. for the year endedDecember 31, 2013 , fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information containedin this report fairly presents, in all material respects, the financial condition and results of operations of Pacira Pharmaceuticals, Inc.Date:February 25, 2014/s/ JAMES SCIBETTAJames ScibettaSenior Vice President and Chief Financial Officer(Principal Financial Officer)QuickLinksExhibit 32.2STATEMENT PURSUANT TO 18 U.S.C. §1350

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